<PAGE> 1
As filed with the Securities and Exchange Commission on February 26, 1997
Registration Nos. 33-73404
811-8236
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 15 /x/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/x/
Amendment No. 15 /x/
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Northern Funds
(Exact Name of Registrant as Specified in Charter)
207 E. Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-595-9111
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Jeffrey A. Dalke, Esquire
Drinker Biddle & Reath
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[-] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
The Registrant has previously filed a declaration of indefinite registration of
its shares of beneficial interest, $.0001 par value per share, of all classes
of the Registrant, now existing or hereafter created, under the Securities Act
of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. Registrant's Rule 24f-2 Notice for its fiscal year ended March 31,
1996 was filed on May 24, 1996.
This filing includes the Prospectus and Statement of Additional
Information for the Small Company Index Fund of Northern Funds.
<PAGE> 2
NORTHERN FUNDS
Small Company Index Fund
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A Item Number Location
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Part A Prospectus Caption
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<S> <C> <C>
1. Cover Page................................. Cover Page
2. Synopsis................................... Expense Summary
3. Condensed Financial Information............ *
4. General Description of Registrant.......... Cover Page; Investment
Information; Additional Investment
Information, Risks and
Considerations; Management;
Further Information
5. Management of the Fund..................... Management; Opening an
Account and Purchasing
Shares; Redeeming and
Exchanging Shares
5A. Management's Discussion of
Fund Performance.......................... *
6. Capital Stock and Other Securities Opening an Account and Purchasing
Shares; Redeeming and Exchanging
Shares; Distributions and Taxes;
Further Information
7. Purchase of Securities Being Offered Opening an Account and Purchasing
Shares; Redeeming and Exchanging
Shares
8. Redemption or Repurchase................... Redeeming and Exchanging Shares
9. Pending Legal Proceedings.................. *
</TABLE>
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* Item inapplicable or answer negative.
<PAGE> 3
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 26, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
NORTHERN FUNDS
PROSPECTUS
May __, 1997
Small Cap Index Fund
<PAGE> 4
NORTHERN FUNDS
Small Cap Index Fund
The Northern Trust Company Investment Adviser,
50 S. LaSalle Street Transfer Agent and
Chicago, Illinois 60675 Custodian
1-800-595-9111
The shares offered by this Prospectus represent interests in the Small
Cap Index Fund (the "Fund"). The Fund's investment objective is to seek to
provide investment results approximating the aggregate price and dividend
performance of the securities included in the Russell 2000 Small Stock Index
(the "Russell Index"). The Fund is one of 24 no-load mutual funds (the "Funds")
comprising the Northern Funds. Northern Funds is a no-load management
investment company designed to offer investors a range of investment
opportunities. Northern Funds also offers money market funds and domestic and
international fixed income and other equity funds, which are described in
separate Prospectuses.
The Fund is advised by The Northern Trust Company ("Northern Trust").
The Fund may require the payment of an additional transaction fee amount equal
to 0.75% of amounts invested after July 31, 1997. Shares of the Fund are
redeemed without any redemption charge by Northern Funds. In addition, Northern
Trust and other institutions may charge their customers for their services in
connection with investments.
This Prospectus provides information about the Fund that you should
know before investing. It should be read and retained for future reference.
Further information is included in a Statement of Additional Information dated
May __, 1997 (the "Additional Statement"), which is incorporated by reference
herein. For a free copy, write to Northern Funds' distributor, Sunstone
Distribution Services, LLC, at 207 E. Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 or call 1-800-595-9111.
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST COMPANY, ITS
PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED
BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May __, 1997
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS............................................................................................. 1
EXPENSE SUMMARY........................................................................................ 4
INVESTMENT INFORMATION................................................................................. 5
Investment Objective and Policies............................................................. 6
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS............................................ 8
Description of Securities and Investment Techniques........................................... 8
Investment Restrictions....................................................................... 13
OPENING AN ACCOUNT AND PURCHASING SHARES............................................................... 14
Purchasing Shares Directly from the Funds..................................................... 14
Purchasing Shares Through Northern Trust and Other
Institutions............................................................................ 16
Additional Purchase Information............................................................... 17
REDEEMING AND EXCHANGING SHARES........................................................................ 18
Redeeming and Exchanging Directly from the Fund............................................... 18
Redeeming and Exchanging Through Northern Trust and
Other Institutions..................................................................... 21
Additional Redemption and Exchange Information................................................ 21
DISTRIBUTIONS AND TAXES................................................................................ 22
Distributions................................................................................. 22
Taxes......................................................................................... 23
MANAGEMENT............................................................................................. 24
Board of Trustees............................................................................. 24
Investment Adviser, Transfer Agent and Custodian.............................................. 24
Administrator and Distributor................................................................. 26
Service Organizations......................................................................... 26
Expenses...................................................................................... 27
FURTHER INFORMATION.................................................................................... 28
Determining Share Price....................................................................... 28
Advertising Performance....................................................................... 28
Voting Rights................................................................................. 30
Shareholder Reports........................................................................... 30
Retirement Plans.............................................................................. 30
Miscellaneous................................................................................. 31
</TABLE>
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HIGHLIGHTS
Q. WHAT IS NORTHERN FUNDS?
A. Northern Funds is an open-end management investment company (commonly
known as a mutual fund) that offers investors the opportunity to
invest in different investment portfolios, each having separate
investment objectives and policies. Northern Funds presently consists
of twenty-four portfolios, including money market, domestic and
international fixed income and equity portfolios. This Prospectus
describes only the Small Cap Index Fund, which seeks to provide
investment results, before expenses, approximating the aggregate prize
and dividend performance of the securities included in the Russell
2000 Small Stock Index (the "Russell Index").
Q. WHO ADVISES THE FUND?
A. Northern Trust, the principal subsidiary of Northern Trust
Corporation, serves as investment adviser to the Fund. Northern Trust
also serves as the Fund's transfer agent and custodian. Northern Trust
administered over $778.9 billion in assets as of December 31, 1996 in
various capacities, including approximately $130.3 billion for which
Northern Trust had investment management responsibility. See
"Management."
Q. HOW DOES ONE BUY AND REDEEM SHARES?
A. Shares of the Fund are distributed by Sunstone Distribution Services,
LLC. Shares may be purchased directly from Northern Funds or through a
qualified account at Northern Trust or certain other institutions.
The Fund may require the payment of an additional transaction fee
amount on purchases of shares of the Fund made after July 31, 1997
equal to 0.75% of the dollar amount invested. If assessed, the
additional transaction fee amount will be paid to the Fund, not to
Sunstone Distribution Services, LLC or to Northern Trust. It will not
be a sales charge. The amount will apply to initial investments in
the Fund and all subsequent purchases (including purchases made in
exchange from the other portfolios of Northern Funds), but not to
reinvested dividends or capital gains distributions. More information
about the additional purchase price amount is provided below under
"Investment Information - Investment Objective and Policies." The
minimum initial investment for purchases directly with Northern Funds
is $2,500 ($500 for an IRA; $250 for a spousal IRA; and $250 under the
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Automatic Investment Plan). The minimum for subsequent
investments is $50. Northern Trust or other organizations
may impose particular customer account requirements such as
minimum account sizes.
Additional share purchase and redemption information for both
purchases and redemptions directly with Northern Funds or through
qualified accounts is provided below under "Opening an Account and
Purchasing Shares" and "Redeeming and Exchanging Shares."
Q. WHAT SHAREHOLDER SERVICES ARE AVAILABLE?
A. Northern Funds offers the advantage of automatic dividend
reinvestment in shares of the Fund or in another Northern
Fund, exchange privileges among Northern Funds should your
investment goals change, telephone exchange and redemption
privileges, an Automatic Investment Plan (with a reduced
minimum initial investment) and a Systematic Withdrawal
Plan. See "Opening an Account and Purchasing Shares" and
"Redeeming and Exchanging Shares." Shares of Northern Funds
may be purchased in connection with a variety of tax-
sheltered retirement plans. See "Further Information --
Retirement Plans."
Q. WHEN ARE DISTRIBUTIONS MADE?
A. Dividends from the net investment income of the Fund are declared and
paid at least annually.
Net realized capital gains of the Fund are distributed at least
annually. See "Distributions and Taxes."
Q. WHAT ARE THE POTENTIAL RISKS PRESENTED BY THE FUND'S
INVESTMENT PRACTICES?
A. Investing in the Fund involves the risks common to an
investment in common stocks, including the risk that the
financial condition of the issuers of securities held by the
Fund or the general condition of the common stock market may
worsen. When this occurs, the value of the securities held
by the Fund and, therefore, the value of its shares may
decline. In addition, there can be no assurance that the
Fund will achieve investment results that approximate the
performance of the Russell Index.
The Fund may engage in certain transactions involving puts and calls.
The Fund may lend its securities and enter into repurchase agreements
and reverse repurchase agreements with qualifying banks and
broker/dealers which may involve leveraging. The Fund may also
purchase eligible securities on a "when-issued" basis and may purchase
or sell securities
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<PAGE> 9
on a "forward commitment" or "delayed settlement" basis. The Fund may
invest up to 15% of its net assets in illiquid securities. The Fund
may also invest in futures contracts, options and securities issued by
other investment companies.
The foregoing is a summary of certain of the potential risks
presented by the Fund's investment practices. Details regarding these
and other risks presented by the policies of the Fund are described
under "Additional Investment Information, Risks and Considerations."
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'
EXPENSE SUMMARY
The following tables will help you understand the expenses
you will bear directly or indirectly as a shareholder of the Fund.
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or
selling Fund shares. ANNUAL OPERATING EXPENSES are the annualized
operating expenses the Fund expects to pay during the current fiscal
year. Examples based on this information are also provided.
<TABLE>
<CAPTION>
SMALL COMPANY INDEX
FUND
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases.............................................. None
Sales Charge Imposed on
Reinvested Distributions.......................................... None
Additional Transaction Fee Amount (as a
percentage of Amount Invested)(1)................................. 0.75%
Deferred Sales Charge
Imposed on Redemptions............................................ None
Redemption Fees(1)................................................. None
Exchange Fees...................................................... None
ANNUAL OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees (after
fee reductions
and waivers)........................................................ 0.50%
12b-1 Fees......................................................... 0.00%
Other Expenses (after
fee reductions and
reimbursements)................................................... 0.15%
TOTAL OPERATING EXPENSES(2)
After Fee Reductions,
Waivers and
Reimbursements................................................... 0.65%
====
</TABLE>
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<TABLE>
<S> <C>
EXAMPLE OF EXPENSES
Based on the foregoing table,
you would pay the following
expenses on a $1,000
investment, assuming a 5%
annual return and redemption
at the end of each time period:
One Year........................................................... $ 7
Three Years........................................................ $21
</TABLE>
(1) To prevent the Small Cap Index Fund from being adversely affected by
the transaction costs associated with share purchases after
July 31, 1997, the Fund may sell shares at a price equal to the net
asset value of the shares plus an additional transaction fee amount
equal to .75% of such value. If assessed, such amounts will not be
sales charges, but will be retained by the Fund for the benefit of all
shareholders. See "Investment Information - Investment Objective and
Policies," "Opening an Account and Purchasing Shares" and "Redeeming
and Exchanging Shares."
(2) A fee of $15.00 may be applicable for each wire redemption.
(3) The table and example shown do not reflect any charges that may be
imposed by Northern Trust or other institutions on their customers.
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"Other Expenses" is based on estimated amounts the Fund expects to pay
during the current fiscal year. Without the fee reductions, waivers and
reimbursements, "Management Fees" would be .65% for the Fund, the estimated
"Other Expenses" for the current fiscal year would be 0.27%, and "Total
Operating Expenses" would be 0.92%, for the Fund. In addition, Northern Funds
does not expect to pay any 12b-1 fees (otherwise payable at an annual rate of
up to 0.25%) under its Distribution and Service Plan for the current fiscal
year. For more expense information, see "Management."
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. THE FUND IS NEW AND ACTUAL OPERATING
EXPENSES AND INVESTMENT RETURN MAY BE MORE OR LESS THAN THOSE SHOWN.
INFORMATION ABOUT THE ACTUAL PERFORMANCE OF THE FUND WILL BE CONTAINED IN THE
FUND'S FUTURE ANNUAL REPORTS TO SHAREHOLDERS, WHICH MAY BE OBTAINED WITHOUT
CHARGE WHEN THEY BECOME AVAILABLE.
INVESTMENT INFORMATION
The investment objective and policies of the Fund are described below.
Additional information regarding the securities, investment techniques and
restrictions of the Fund
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<PAGE> 12
are described under "Additional Investment Information, Risks and
Considerations."
INVESTMENT OBJECTIVE AND POLICIES.
The Fund seeks to provide investment results approximating the
aggregate price and dividend performance of the securities included in the
Russell Index. Under normal market conditions, the Fund will invest at least
65% of its total assets in the securities included in the Russell Index. The
Russell Index is a market value-weighted index comprised of the stocks of the
smallest 2,000 companies in the Russell 3000 Index which is comprised of the
stocks of 3,000 large U.S. domiciled companies (based on market capitalization)
that represent approximately 98% of the investable U.S. equity markets. Because
of its emphasis on the smallest 2,000 companies, the Russell Index represents
approximately 10% of the total market capitalization of the Russell 3000 Index.
As of January 31, 1997 the average market capitalization of the companies
included in the Russell Index was approximately $447 million. The Russell Index
is reconstituted annually to reflect changes in market capitalization. The
primary criteria used by Frank Russell & Company ("Russell") to determine the
initial list of securities eligible for inclusion in the Russell 3000 Index
(and, accordingly, the Russell Index) is total market capitalization adjusted
for large private holdings and cross-ownership. However, companies are not
selected by Russell for inclusion in the Russell Index because they are
expected to have superior stock price performance relative to the market in
general or other stocks in particular. Russell makes no representation or
warranty, implied or express, to purchasers of Fund shares or any member of the
public regarding the advisability of investing in the Fund or the ability of
the Russell Index to track general market performance of small capitalization
stocks.
The Fund will be constructed to have aggregate investment
characteristics similar to those of the Russell Index as a whole. The Fund will
invest in securities which will be selected on the basis of such factors as
market capitalization, beta, industry sectors and economic factors. The number
of issues included will be a function of the Fund's liquidity and size. The
Fund will be restructured annually when the Russell Index is reconstituted. The
Fund will use a proprietary rebalancing algorithm that attempts to screen out
extremely illiquid issues while minimizing portfolio turnover and related
expenses.
It should be noted that small companies in which the Fund may invest
may have limited product lines, markets, or financial resources, or may be
dependent upon a small management group, and their securities may be subject to
more abrupt or erratic market movements than larger, more established
companies, both because their securities typically are traded in lower volume
and because
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<PAGE> 13
the issuers typically are subject to a greater degree of changes in their
earnings and prospects.
Northern Trust believes that under normal market conditions, the
quarterly performance of the Fund, before expenses, will be within a .95
correlation with the Russell Index. However, there is no assurance that the
Fund will be able to do so on a consistent basis. Deviations from the
performance of the Russell Index ("tracking error") may result from shareholder
purchases and redemptions of shares of the Fund that occur daily, as well as
from the expenses borne by the Fund. Such purchases and redemptions may
necessitate the purchase and sale of securities by the Fund, and the resulting
transaction costs which may be substantial because of the number and the
characteristics of the securities held. In addition, transaction costs are
incurred because sales of securities received in connection with spin-offs and
other corporate reorganizations are made to conform the Fund's holdings with
its investment objective. Tracking error may also occur due to factors such as
the size of the Fund, the maintenance of a cash reserve pending investment or
to meet expected redemptions, changes made in the Russell Index or the manner
in which the Russell Index is calculated. In the event the performance of the
Fund is not comparable to the performance of the Russell Index, the Board of
Trustees will evaluate the reasons for the deviation and the availability of
corrective measures. These measures may include adjustments to Northern Trust's
portfolio management practices. If substantial deviation in the Fund's
performance were to continue for extended periods, it is expected that the
Board of Trustees would consider possible changes to the Fund's investment
objective.
After July 31, 1997, the Fund may require the payment of an additional
transaction fee amount on purchases of shares of the Fund equal to 0.75% of the
dollar amount invested. If assessed, the additional transaction fee amount will
be paid to the Fund, not to Sunstone Distribution Services, LLC or Northern
Trust. It will not be a sales charge. The additional transaction fee amount
will apply to initial investments in the Fund and all subsequent purchases
(including purchases made by exchange from other Funds of the Trust), but not
to reinvested dividends or capital gain distributions. The purpose of the
additional transaction fee amount will be to indirectly allocate transaction
costs associated with new purchases to investors making those purchases, thus
protecting existing shareholders. These costs include: (1) brokerage costs; (2)
market impact costs--i.e., the increase in market prices which may result when
the Fund purchases thinly traded stocks; and, most importantly, (3) the effect
of the "bid-ask" spread in the over-the-counter market. (Securities in the
over-the-counter market are bought at the "ask" or purchase price, but are
valued in the Fund at the last quoted bid price). The 0.75% amount represents
Northern Trust's estimate of the brokerage and other transaction costs which
may be incurred by the Fund in acquiring
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<PAGE> 14
stocks of small capitalization companies. Without the additional transaction
fee amount, the Fund would generally be selling its shares at a price less than
the cost to the Fund of acquiring the portfolio securities necessary to
maintain its investment characteristics, resulting in reduced investment
performance for all shareholders in the Fund. With the additional transaction
fee amount, the transaction costs of acquiring additional stocks will not be
borne by all existing shareholders, but the source of funds for these costs
will be the purchase price paid by those investors making additional purchases.
Because these costs will be covered by the additional transaction fee amount
for shares and therefore will not need to be paid out of the Fund's other
assets, the Fund is expected to track the Russell Index more closely.
The Fund may invest in options, futures contracts and securities
issued by other investment companies. The Fund may also invest in certain
short-term fixed income securities as cash reserves. However, the Fund will not
invest in cash reserves, options or futures contracts and related options as
part of a temporary defensive strategy such as lowering its investment in
common stocks to protect against potential stock market declines.
ADDITIONAL INVESTMENT INFORMATION, RISKS AND CONSIDERATIONS
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, the Fund may write covered call options, buy put options, buy call
options and write secured put options. These options may relate to particular
securities, financial instruments, or stock indices and may or may not be
listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. The Fund will not purchase put and call options where the
aggregate premiums on outstanding options exceed 5% of its net assets at the
time of purchase, and will not write options on more than 25% of the value of
its net assets (measured at the time an option is written). Options trading is
a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections
afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Fund may
also invest in futures contracts and options on futures contracts to maintain
liquidity to meet potential shareholder redemptions, invest cash balances or
dividends or minimize trading costs. The value of the Fund's futures contracts
may equal or exceed 100% of the Fund's total assets, although the Fund will not
purchase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on
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<PAGE> 15
its existing futures positions plus the amount of premiums paid for related
futures options is 5% or less of its net assets.
Futures contracts obligate the Fund, at maturity, to take or make
delivery of certain securities or, the cash value of a securities index. The
Fund may purchase and sell call and put options on futures contracts traded on
an exchange or board of trade. When the Fund purchases an option on a futures
contract, it has the right to assume a position as a purchaser or a seller of a
futures contract at a specified exercise price anytime during the option
period. When the Fund sells an option on a futures contract, it becomes
obligated to sell or buy a futures contract if the option is exercised. In
connection with the Fund's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and
options are: (a) the imperfect correlation between the change in market value
of the instruments held by the Fund and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; and (c)
losses caused by unanticipated market movements, which are potentially
unlimited. For further discussion of risks involved with domestic and foreign
futures and options, see "Futures Contracts and Related Options" and Appendix B
in the Additional Statement.
Northern Funds intends to comply with the regulations of the Commodity
Futures Trading Commission exempting the Fund from registration as a "commodity
pool operator."
LIQUIDITY MANAGEMENT. Pending investment, to meet anticipated redemption
requests, or as a temporary defensive measure, the Fund may also invest without
limitation in short-term U.S. Government obligations, high quality money market
instruments, variable and floating rate instruments and repurchase agreements.
High quality money market instruments may include Europaper, which is
U.S. dollar-denominated commercial paper of a foreign issuer. The Fund may also
purchase U.S. dollar-denominated bank obligations, such as certificates of
deposit, bankers' acceptances and interest-bearing savings and time deposits,
issued by U.S. or foreign banks or savings institutions having total assets at
the time of purchase in excess of $1 billion. Short-term obligations purchased
by the Fund will either have short-term debt ratings at the time of purchase in
the top two categories by one or more unaffiliated nationally recognized
statistical rating organizations ("NRSROs") or be issued by issuers with such
ratings. Unrated instruments purchased by the
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<PAGE> 16
Fund will be of comparable quality as determined by Northern Trust.
Variable and floating rate instruments may include variable amount
master demand notes that permit the indebtedness to vary in addition to
providing for periodic adjustments in the interest rate and long-term variable
and floating rate bonds (sometimes referred to as "Put Bonds") where the Fund
obtains at the time of purchase the right to put the Bond back to the issuer or
a third party at par at a specific date.
Under a repurchase agreement the Fund agrees to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price. Although the
securities subject to a repurchase agreement may bear maturities exceeding one
year, settlement for the repurchase agreement will never be more than one year
after the Fund's acquisition of the securities and normally will be within a
shorter period of time. Securities subject to repurchase agreements are held
either by Northern Funds' custodian or subcustodian (if any), or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement
will be required to maintain the value of the securities subject to the
agreement in an amount exceeding the repurchase price (including accrued
interest). Default by the seller would, however, expose the Fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Fund is authorized to
make limited borrowings as described below under "Investment Restrictions." If
the securities held by the Fund should decline in value while borrowings are
outstanding, the market value of the Fund's portfolio will decline in value
proportionately more than the decline in value it would otherwise suffer.
Borrowings may be made through reverse repurchase agreements under which the
Fund sells portfolio securities to financial institutions such as banks and
broker/dealers and agrees to repurchase them at a particular date and price.
The Fund may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Fund may utilize reverse repurchase agreements when it is
anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the
transaction. This use of reverse repurchase agreements may be regarded as
leveraging and, therefore, speculative. Reverse repurchase agreements involve
the risks that the interest income earned in the investment of the proceeds
will be less than the interest expense, that the market value of the securities
sold by the Fund may decline below the price of the securities the Fund
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<PAGE> 17
is obligated to repurchase and that the securities may not be returned to the
Fund. During the time a reverse repurchase agreement is outstanding, the Fund
will maintain a segregated account with Northern Funds' custodian containing
liquid assets having a value at least equal to the repurchase price. The Fund's
reverse repurchase agreements, together with any other borrowings, will not
exceed, in the aggregate, 33 1/3% of the value of its total assets. In
addition, whenever borrowings exceed 5% of the Fund's total assets, the Fund
will not make any investments.
SECURITIES LENDING. The Fund may seek additional income from time to time by
lending securities on a short-term basis to banks, brokers and dealers. The
securities lending agreements will require that the loans be secured by
collateral in cash, cash equivalents, U.S. Government securities or irrevocable
bank letters of credit maintained on a current basis equal in value to at least
the market value of the loaned securities. The Fund may not make such loans in
excess of 33 1/3% of the value of its total assets. Securities loans involve
risks of delay in receiving additional collateral or in recovering the loaned
securities, or possibly loss of rights in the collateral if the borrower of the
securities becomes insolvent.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS.
The Fund may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Securities purchased or sold on a
when-issued, delayed-delivery or forward commitment basis involve a risk of
loss if the value of the security to be purchased declines, or the value of the
security to be sold increases, before the settlement date. Although the Fund
will generally purchase securities with the intention of acquiring them, the
Fund may dispose of securities purchased on a when- issued, delayed-delivery or
a forward commitment basis before settlement when deemed appropriate by
Northern Trust.
INVESTMENT COMPANIES. In connection with the management of its daily cash
positions, the Fund may invest in securities issued by other investment
companies which invest in short-term, high-quality debt securities and
determine their net asset value per share based on the amortized cost or
penny-rounding method of valuation. In addition, the Fund may invest in
securities issued by other investment companies if otherwise consistent with
its investment objectives and policies. As a shareholder of another investment
company, a Fund will bear, along with other shareholders, its pro rata portion
of the other investment company's expenses including advisory fees. These
expenses would be in addition to the advisory fees and other expenses the Fund
bears directly in connection with its own operations.
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Investments in other investment companies will be subject to the limits imposed
by the 1940 Act.
ILLIQUID SECURITIES. The Fund may invest up to 15% of the value of its net
assets in illiquid securities. Illiquid securities generally include repurchase
agreements and time deposits with notice/termination dates in excess of seven
days, unlisted over-the-counter options and certain securities which are
subject to trading restrictions because they are not registered under the
Securities Act of 1933 (the "1933 Act").
If otherwise consistent with its investment objective and policies,
the Fund may purchase commercial paper issued pursuant to Section 4(2) of the
1933 Act and securities that are not registered under the 1933 Act but can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. These securities will not be considered illiquid so long as Northern
Trust determines, under guidelines approved by Northern Funds' Board of
Trustees, that an adequate trading market exists. This practice could increase
the level of illiquidity during any period that qualified institutional buyers
become uninterested in purchasing these securities. The ability to sell to
qualified institutional buyers under Rule 144A is a relatively recent
development, and it is not possible to predict how this market will ultimately
develop.
PORTFOLIO TRANSACTIONS AND TURNOVER. Northern Trust's Advisory Agreement
provides that in selecting brokers or dealers to place orders for transactions
(a) involving common and preferred stocks, Northern Trust shall use its best
judgment to obtain the best overall terms available and (b) involving bonds and
other fixed income obligations, Northern Trust shall attempt to obtain best net
price and execution. In assessing the best overall terms available for any
transaction, Northern Trust is to consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. In evaluating the best overall terms available and
in selecting the broker or dealer to execute a particular transaction, Northern
Trust may consider the brokerage and research services provided to the Fund
and/or other accounts over which Northern Trust or an affiliate of Northern
Trust exercises investment discretion. These brokerage and research services
may include industry and company analyses, portfolio services, quantitative
data, market information systems and economic and political consulting and
analytical services.
The portfolio turnover rate of the Fund will vary from year to year,
and may be affected by changes in the holdings of specific issuers. High
portfolio turnover (100% or more) may
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result in the realization of short-term capital gains which are taxable to
shareholders as ordinary income. In addition, higher turnover rates can result
in corresponding increases in commissions and other transaction costs. Northern
Trust will not consider turnover rate a limiting factor in making investment
decisions. Northern Funds expects that the annual turnover rate of the Fund
will generally not exceed 30%.
MISCELLANEOUS. The Fund does not intend to purchase certificates of deposit of
Northern Trust or its affiliate banks, commercial paper issued by Northern
Trust's parent holding company or other securities issued or guaranteed by
Northern Trust, its parent holding company or their subsidiaries or affiliates.
The Fund may experience higher custody costs than other stock funds
because it maintains a large portfolio of securities consistent with its
investment objective.
INVESTMENT RESTRICTIONS
The Fund's investment objective may be changed by Northern Funds' Board of
Trustees without shareholder approval. Shareholders will, however, be notified
of any changes. Any such change may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund. No assurance can be provided
that the Fund will achieve its investment objective.
The Fund has also adopted certain fundamental investment restrictions
that may be changed only with the approval of a majority of the Fund's
outstanding shares. The following description summarizes several of the Fund's
fundamental restrictions, which are set forth in full in the Additional
Statement.
The Fund may not:
1. purchase securities (except U.S. Government securities and
repurchase agreements collateralized by such securities) if more than 5% of its
total assets at the time of purchase will be invested in the securities of any
one issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this 5% limitation;
2. subject to the foregoing 25% exception, purchase more
than 10% of the outstanding voting securities of any issuer;
3. invest 25% or more of its total assets at the time of
purchase in securities of issuers whose principal business activities are in
the same industry with certain limited exceptions set forth in the Additional
Statement; and
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4. borrow money except in amounts up to 33 1/3% of the
value of its total assets at the time of borrowing.
OPENING AN ACCOUNT AND PURCHASING SHARES
An investment account may be opened and shares purchased directly from
Northern Funds by following the instructions below under "Purchasing Shares
Directly from the Fund." If you maintain certain accounts at Northern Trust or
another institution (such as a bank or broker/dealer) that has entered into an
agreement with Northern Funds to provide services to its customers, you may
purchase shares through your institution in accordance with its procedures. See
"Purchasing Shares Through Northern Trust and Other Institutions" below for
more details. If you have any questions or need any assistance in opening an
investment account or purchasing shares, call 1-800-595-9111.
PURCHASING SHARES DIRECTLY FROM THE FUNDS
For your convenience, there are a number of ways to invest directly
with Northern Funds. When establishing an investment account directly with
Northern Funds, the minimum initial investment in the Fund is $2,500 ($500 for
an IRA; $250 for a spousal IRA; $250 under the Automatic Investment Plan; and
$500 for employees of the Northern Trust and its affiliates). The minimum
subsequent investment is $50 (except for reinvestments of distributions for
which there is no minimum). The Fund reserves the right to waive these
minimums.
BY MAIL. You may purchase shares by mail by sending a Purchase Application, a
copy of which accompanies this Prospectus, together with a check or money order
payable to Northern Funds in the envelope provided or by addressing your
envelope to Northern Funds at P.O. Box 75986, Chicago, Illinois 60690-6319.
Additional requirements may be imposed. If using overnight delivery use the
following address: 801 South Canal Street, Chicago, Illinois 60607, Attn:
Northern Funds. Your check must be drawn on a bank located in the U.S. and must
be payable in U.S. dollars. When making subsequent investments, enclose your
check with the return remittance portion of the confirmation of your previous
investment, or indicate on your check or a separate piece of paper your name,
address and account number.
A $20 fee will be charged by the Transfer Agent if any check used for
investment does not clear. In addition, you will be responsible for any loss
suffered by the Fund. If you purchase shares by check and subsequently request
the redemption of those shares, Northern Funds may delay the payment of
redemption proceeds until the Transfer Agent is satisfied that the check has
cleared, which may take up to 15 days from the purchase date. If you anticipate
redemptions soon after purchase, you may wish to
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wire funds to avoid delays. Northern Funds will not accept payment in cash or
third party checks for the purchase of shares.
BY WIRE. You may make initial or subsequent investments in shares of the Fund
by wiring federal funds. If you are opening an account with a wire purchase,
you must call 1-800-595-9111 for instructions prior to wiring funds. You must
promptly complete a Purchase Application and forward it to the Transfer Agent
in the envelope provided herewith, or by addressing your envelope to Northern
Funds at P.O. Box 75986, Chicago, Illinois 60690-6319. Additional requirements
may be imposed. Redemptions will not be paid until your completed application
has been received by the Transfer Agent. If you wish to add to an existing
account by wire purchase, you may wire federal funds to:
The Northern Trust Company
Chicago, Illinois
ABA Routing No. 0710-00152,
(Reference 10 Digit Fund Account Number)
(Reference Shareholder's Name)
DIRECT DEPOSIT. You may purchase additional shares through the Direct Payroll
Deposit Plan offered by Northern Funds. Through this plan, periodic investments
(minimum $50) are made automatically from your payroll check into your existing
Fund account. In order to participate in the plan, your employer must have
direct deposit capabilities through the Automated Clearing House ("ACH")
available to its employees. The plan may be used for other direct deposits,
such as social security checks, military allotments, and annuity payments.
Further details about this service may be obtained from the Transfer Agency by
calling 1-800-595-9111. Northern Funds reserves the right, at any time and
without prior notice, to limit or terminate the Direct Payroll Deposit
privilege or its use in any manner by any person.
AUTOMATIC INVESTMENT. Northern Funds offers an Automatic Investment Plan that
allows you to automatically purchase shares on a regular, monthly basis ($250
initial minimum, $50 monthly minimum additions). Under this plan the Transfer
Agent originates an ACH request to your financial institution which forwards
funds periodically to the Transfer Agent to purchase shares. The plan can be
established with any financial institution that participates in the ACH funds
transfer system. No service fee is currently charged by Northern Funds for
participation in the plan. You may establish the plan by completing the
appropriate section on the Purchase Application when opening an account. You
may also establish the plan after an account is opened by completing an
Automatic Investment Plan Application which may be obtained by calling
1-800-595-9111. If an investor discontinues participation in the plan, the Fund
reserves the right to redeem the investor's account
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involuntarily, upon 60 days' written notice, if the account's net asset value
is $1,000 or less.
DIRECTED REINVESTMENTS. In addition to having your income dividends and/or
capital gains distributions reinvested in shares of the Fund from which such
distributions are paid, you may elect the directed reinvestment option and have
dividends and capital gains distributions automatically invested in another
Northern Fund. In addition, systematic withdrawals from one account and
reinvestments in another account may be established. See "Redeeming and
Exchanging Directly from the Funds -- Systematic Withdrawals." Reinvestments
can only be directed to an existing Northern Funds' account (which must meet
the minimum investment requirement). Directed reinvestments may be used to
invest funds from a regular account to another regular account, from a
qualified plan account to another qualified plan account, or from a qualified
plan account to a regular account. Directed reinvestments from a qualified plan
account to a regular account may have adverse tax consequences including
imposition of a penalty tax and therefore you should consult your own tax
adviser before commencing these transactions.
BY EXCHANGE. You may open a new account or add to an existing account by
exchanging shares of the Fund for shares of any other Fund offered by Northern
Funds. See "Redeeming and Exchanging Shares" for details.
PURCHASING SHARES THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
Northern Trust customers may purchase shares through their qualified
accounts and should consult with their account officer for additional
information and instructions. Customers of other institutions (together with
Northern Trust, "Service Organizations"), such as banks or broker-dealers that
have entered into agreements with Northern Funds, should contact their account
officers for appropriate purchase instructions. Northern Trust or another
Service Organization may impose particular customer account requirements in
connection with investments in the Fund, such as minimum account size or
minimum account thresholds above which excess cash balances may be invested in
Fund shares. To determine whether you may purchase shares through your
institution, contact your institution directly or call 1-800-595-9111.
Purchases (and redemptions) placed through Northern Trust or another Service
Organization are processed only on days that both Northern Funds and the
particular institution are open for business.
Depending on the terms of the particular account used to purchase Fund
shares, Northern Trust or other institutions may impose charges against the
account. These charges could include asset allocation fees, account maintenance
fees, sweep fees, compensating balance requirements or other charges based upon
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<PAGE> 23
account transactions, assets or income. The charges will reduce the net return
on an investment in a Fund. For further discussion of Service Organizations and
the procedures for purchasing (and redeeming) shares through them, see
"Management - - Service Organizations."
ADDITIONAL PURCHASE INFORMATION
EFFECTIVE TIME AND PRICE OF PURCHASES. A purchase order for Fund shares
received by the Transfer Agent by 3:00 p.m. (Chicago Time) on a Business Day
(as defined below under "Further Information -- Miscellaneous") will be priced
at the net asset value determined on that day, plus, if required by the Fund
after July 31, 1997, an additional transaction fee amount of .75 of 1% of the
net asset value determined on that day, provided that either: (a) the order is
accompanied by payment of the purchase price; or (b) the order is placed by
Northern Trust or a Service Organization that is acting on behalf of itself or
its qualified customer accounts and undertakes to make payment on the next
Business Day in the form of federal funds or other immediately available funds.
If an order in proper form with proper payment is not received by the Transfer
Agent by such time, the order will be processed at the next determined net
asset value after the Transfer Agent has received both an order in proper form
and such payment.
MISCELLANEOUS PURCHASE INFORMATION. You will be responsible for all losses and
expenses of the Fund as a result of a check that does not clear or an ACH
transfer that is rejected. Northern Funds may decline to accept a purchase
order when, in the judgment of Northern Funds or its investment adviser, it
would not be in the best interest of existing shareholders to accept the order.
Federal regulations require that you provide a social security number or other
certified taxpayer identification number upon opening or reopening an account.
Purchase Applications without such a number or an indication that a number has
been applied for will not be accepted. If a number has been applied for, the
number must be provided and certified within sixty days of the date of the
Purchase Application. Payment for shares of the Fund may, in the discretion of
Northern Trust, be made in the form of securities that are permissible
investments for the respective Fund. For further information, see the
Additional Statement. Additions or changes to any information in your account
registration (for example, a change in registration from a joint account to an
individual account) may be made by submitting a written request to the Transfer
Agent accompanied by a signature guarantee by a financial institution that is a
participant in the Stock Transfer Agency Medallion Program ("STAMP") or such
other means or evidence of authority as may be acceptable to the Transfer
Agent. Additional requirements may be imposed. In the interests of economy and
convenience, certificates representing shares of the Funds are not issued.
Northern Funds may reproduce this Prospectus in an electronic
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<PAGE> 24
format which may be available on the Internet. If you have received this
Prospectus in its electronic format you, or your representative, may contact
the transfer agent for a free paper copy of this Prospectus by writing to
Northern Funds Center at P.O. Box 75986, Chicago, Illinois 60690-6319 or by
calling 1-800-595-9111.
REDEEMING AND EXCHANGING SHARES
You can arrange to withdraw your investment in the Fund by selling
some or all of your shares. This process is known as "redeeming" your shares.
The procedures for redeeming shares differ depending on whether you purchase
your shares directly from Northern Funds or through Northern Trust or another
Service Organization. If you purchase your shares through an account at
Northern Trust or another Service Organization, you will redeem them in
accordance with the instructions pertaining to that account.
REDEEMING AND EXCHANGING DIRECTLY FROM THE FUND
When you purchase your shares directly from Northern Funds, you may
redeem or exchange shares by the methods described below. You may also use any
of these methods if you purchase your shares through an account at Northern
Trust or another Service Organization and you appear on Northern Funds' records
as the registered holder. You may call 1-800-595-9111 if you have any questions
regarding redemptions or exchanges.
Northern Funds imposes no charges when you redeem or exchange shares.
However, after July 31, 1997, the Fund may require an additional transaction
fee amount equal to .75 of 1% of the Fund's net asset value on exchange orders
involving the purchase of shares of the Fund. In addition, when shares are
purchased through Northern Trust or another Service Organization, a fee may be
charged by those institutions for providing services in connection with your
investment.
BY MAIL. You may redeem shares in any number or dollar amount by sending a
written request to Northern Funds, P.O. Box 75986, Chicago, Illinois
60690-6319. The redemption request must state the number of shares or the
dollar amount to be redeemed and identify the Fund account number. If the
redemption proceeds are to be sent elsewhere than the address of record, each
request must be accompanied by a signature guarantee by a financial institution
that participates in STAMP or such other means or evidence of authority as may
be acceptable to the Transfer Agent. In addition, written requests for
redemptions exceeding $50,000 must be accompanied by a signature guarantee by a
financial institution that participates in STAMP or such other means or
evidence of authority as may be acceptable to the Transfer Agent.
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<PAGE> 25
Additional requirements may be imposed. A signature notarized by a notary
public is unacceptable. Northern Funds reserves the right to require signature
guarantees in other circumstances based on the amount of the redemption request
or other factors, and may impose additional requirements.
BY WIRE. If you authorize wire redemptions on your Purchase Application, shares
can be redeemed and the proceeds sent by federal wire transfer to a previously
designated account. You will be charged $15 for each wire redemption unless the
designated account is maintained at Northern Trust or an affiliated bank. The
minimum amount that may be redeemed by this method is $250. Northern Funds
reserves the right to change this minimum or to terminate the wire redemption
privilege at any time without notice. To change bank instructions, a written
request accompanied by a signature guarantee by a financial institution that
participates in STAMP, or such other means or evidence of authority acceptable
to the Transfer Agent, must be sent to Northern Funds, P.O. Box 75986, Chicago,
Illinois 60690-6319. Additional requirements may be imposed.
SYSTEMATIC WITHDRAWALS. Northern Funds offers a Systematic Withdrawal Plan. If
you own shares of the Fund with a minimum value of $10,000, you may elect to
have a fixed sum redeemed at regular intervals ($250 minimum amount per
withdrawal) and distributed in cash or reinvested in one or more of the other
Funds offered by Northern Funds. See "Purchasing Shares Directly from the Fund
- -- Directed Reinvestments." An application form and additional information may
be obtained from the Transfer Agent by calling 1-800-595-9111.
EXCHANGE PRIVILEGE. Northern Funds offers an exchange privilege that permits
you to exchange shares of the Fund for shares of another Fund offered by
Northern Funds. To establish the exchange privilege, you must check the
appropriate box on the Purchase Application or, if your Fund account is already
opened, you may send a written request to the Transfer Agent, and must
establish or maintain accounts with an identical title in each Fund involved in
an exchange transaction. In addition, the shares being exchanged must have a
value of at least $1,000 ($2,500 if a new account is being established by the
exchange).
Since an excessive number of exchanges may be disadvantageous to
Northern Funds, Northern Funds reserves the right, at any time without prior
notice, to suspend, limit or terminate the exchange privilege of any
shareholder who makes more than eight exchanges of shares in a year and/or two
exchanges of shares in a calendar quarter. A shareholder may continue making
exchanges until notified that the exchange privilege has been suspended,
limited or terminated. Questions regarding the exchange privilege may be
directed to 1-800-595-9111 or to your account officer at your Service
Organization.
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<PAGE> 26
Exchanges will be processed only when the shares being acquired can be legally
sold in the state of the investor's residence.
Exchanges may have tax consequences. No exchange fee is currently
imposed by Northern Funds on exchanges, although after July 31, 1997 Fund
shares may be subject to the additional transaction fee amount described under
"Investment Information - Investment Objective and Policies." Northern Funds
reserves the right to impose a separate exchange fee in the future.
TELEPHONE PRIVILEGE. This privilege permits you to redeem or exchange shares by
telephone. To establish the telephone privilege, you must check the appropriate
box on the Purchase Application, or if your Fund account is already opened, you
may send a written request to the Transfer Agent. The request must be signed by
each owner of the account and accompanied by signature guarantees as provided
below or such other means or evidence of authority as may be acceptable to the
Transfer Agent. Once you have established the telephone privilege, you may use
the telephone privilege by calling the Transfer Agent at 1-800-595-9111.
The Transfer Agent has adopted procedures in an effort to establish
reasonable safeguards against fraudulent telephone transactions. The proceeds
for redemption orders will be sent by check, by wire transfer or by transfer to
an account maintained at Northern Trust or an affiliated bank. All checks will
be made payable to the shareholder of record and mailed only to the
shareholder's address of record. The address of record for redemption checks
may be changed only by a written request accompanied by signature guarantees by
a financial institution that participates in STAMP or such other means or
evidence of authority as may be acceptable to the Transfer Agent and sent to
Northern Funds, P.O. Box 75986, Chicago, Illinois 60690-6319. Additionally, the
Transfer Agent utilizes recorded lines for telephone transactions and will
request a form of personal identification if such identification has been
furnished to the Transfer Agent. Neither Northern Funds nor its Transfer Agent
will be responsible for the authenticity of instructions received by telephone
that are reasonably believed to be genuine. To the extent that Northern Funds
fails to use reasonable procedures to verify the genuineness of telephone
instructions, it or its service providers may be liable for instructions that
prove to be fraudulent or unauthorized. In all other cases, you will bear the
risk of loss.
Northern Funds reserves the right to refuse a telephone redemption if
it believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by Northern Funds at any time without
notice. During periods of substantial economic or market change, telephone
redemptions may be difficult to place. If you are unable to contact the
Transfer
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<PAGE> 27
Agent by telephone, shares may also be redeemed by mail as described above
under the discussion of redemptions by mail.
REDEEMING AND EXCHANGING THROUGH NORTHERN TRUST AND OTHER INSTITUTIONS
If you purchase your shares through an account at Northern Trust or
another Service Organization, you will redeem or exchange them in accordance
with the instructions pertaining to that account. If you are listed on the
books of Northern Funds as the shareholder of record, you may also redeem and
exchange your shares using any of the methods described above under "Redeeming
and Exchanging Directly from the Fund." Questions regarding these redemptions
or exchanges should be directed to your account representative at Northern
Trust or another Service Organization. Although Northern Funds imposes no
charges when you redeem, when shares are purchased through Northern Trust or
another Service Organization a fee may be charged by those institutions for
providing services in connection with your account.
ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION
EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES. Redemption orders for
shares of the Fund are processed at the net asset value next determined at 3:00
p.m. (Chicago Time) after receipt in good order by the Transfer Agent by 3:00
p.m. (Chicago Time) on a Business Day. Good order means that the request must
include the following information: the account number and Fund name; the amount
of the transaction (as specified in dollars or number of shares); the
signatures of all account owners exactly as they are registered on the account
(except for telephone and wire redemptions); required signature guarantees (if
applicable); and other supporting legal documents that might be required in the
case of estates, corporations, trusts and certain other accounts. Call
1-800-595-9111 for the additional documentation that may be required of these
entities. Exchange orders are processed at the net asset value per share next
determined after receipt in good order by the Transfer Agent on a Business Day
subject to any additional transaction fee amount applicable to Fund shares as
described under "Investment Information Investment Objective and Policies."
PAYMENT OF REDEMPTION PROCEEDS. The Fund will make payment for redeemed shares
typically within one or two Business Days, but no later than the seventh day
after receipt by the Transfer Agent of a request in good order on a Business
Day, except as otherwise provided by the rules of the SEC. However, if any
portion of the shares to be redeemed represents an investment made by check,
the Fund may delay the payment of the redemption proceeds until the Transfer
Agent is reasonably satisfied that the check has been collected, which could
take up to fifteen days from the purchase
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<PAGE> 28
date. This procedure does not apply to shares purchased by money
order or wire payment.
MISCELLANEOUS REDEMPTION INFORMATION. All redemption proceeds will be sent by
check unless Northern Trust or the Transfer Agent is directed otherwise. The
ACH system may be utilized for payment of redemption proceeds. Redemptions may
not be processed if a shareholder has failed to submit a completed and signed
Purchase Application. Northern Funds may require any information reasonably
necessary to ensure that a redemption has been duly authorized.
To relieve Northern Funds of the cost of maintaining uneconomical
accounts, Northern Funds reserves the right to redeem the shares held in any
account if at the time of any redemption of shares in the account, the net
asset value of the remaining shares in the account falls below $1,000. Before
such involuntary redemption would occur, you would be given at least 60 days'
written notice and, during that period, you could make an additional investment
to restore the account to at least the minimum amount, in which case there
would be no such redemption. Involuntary redemptions will not be made because
the value of shares in an account falls below the minimum amount solely because
of a decline in the Fund's net asset value. Any involuntary redemption would be
at net asset value. Northern Funds also reserves the right to redeem shares
involuntarily if it is otherwise appropriate to do so under the 1940 Act.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Dividends from the net investment income of the Fund are declared and
paid at least annually.
The net realized capital gains of the Fund are distributed at least
annually.
Dividends and capital gain distributions, if any, will reduce the net
asset value of the Fund by the amount of the dividend or capital gain
distribution. Dividends and capital gain distributions, if any, are
automatically reinvested (without any sales charge or portfolio transaction
fee) in additional shares of the Fund at their net asset value determined on
the payment date. You may, however, notify the Transfer Agent in writing that
you elect to have dividends and/or capital gain distributions paid in cash or
reinvested in shares of another Fund offered by Northern Funds at their net
asset value determined on the payment date (provided you maintain an account in
such Fund). This election will become effective for
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<PAGE> 29
distributions paid two days after its receipt by the Transfer Agent.
TAXES
As with any investment, you should consider the tax implications of an
investment in the Fund. The following is only a short summary of the important
tax considerations generally affecting the Fund and its shareholders. You
should consult your tax adviser with specific reference to your own tax
situation. Northern Funds will send written notices to shareholders annually
regarding the tax status of distributions made by the Fund.
FEDERAL TAXES. The Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code (the "Code"), meaning that to the extent the
Fund's earnings are distributed to shareholders as required by the Code, the
Fund itself is not required to pay federal income taxes.
To qualify, the Fund will pay as dividends at least 90% of its
investment company taxable income each year. Investment company taxable income
includes taxable interest, dividends and short-term capital gains less
expenses. Dividends based on either investment company taxable income (which
includes income resulting from investments in options and futures contracts) or
the excess of net short-term capital gain over net long-term capital loss are
treated as ordinary income in determining gross income for tax purposes,
whether or not the dividends are received in cash or additional shares.
(Federal income taxes for distributions to an IRA or other qualified retirement
account are deferred under the Code.)
Any distribution based on the excess of long-term capital gain over
net short-term capital loss will be taxable as a long-term capital gain, no
matter how long you hold Fund shares. If you hold shares for six months or
less, and during that time receive a distribution that is taxable as a
long-term capital gain, any loss realized on the sale of those shares will be
treated as a long-term loss to the extent of the earlier capital gain
distribution.
Before purchasing shares you should consider the effect of any capital
gain distributions and any net income dividends that are expected to be
declared or that have been declared but not yet paid. The per share price will
be reduced by the amount of the payment, so that a shareholder will, in effect,
have paid full price for the shares and then received a portion of the price
back as a taxable distribution. This is because at any given time the value of
your shares includes the undistributed net gains, if any, realized by the Fund
on the sale of portfolio securities, and undistributed dividends and interest
received, less the Fund's expenses. Because such gains and dividends are
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included in the price of your shares, when they are distributed, the price of
your shares is reduced by the amount of the distribution. Accordingly, if your
distribution is reinvested in additional shares, the distribution has no effect
on the value of your investment; while you own more shares, the price of each
share has been reduced by the amount of the distribution. Likewise, if you take
your distribution in cash, the value of your shares after the record date will
be reduced by the cash received.
Any dividends declared in October, November or December and payable to
shareholders during those months will be deemed to have been paid by the Fund
and received by shareholders on December 31, so long as the dividends are
actually paid in January of the following year.
Shareholders may realize a taxable gain or loss when redeeming,
transferring or exchanging their shares (or in using the Systematic Withdrawal
Plan to direct reinvestments), depending on the difference in the prices at
which the shares were originally purchased and when redeemed, transferred or
exchanged.
Northern Funds will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of the dividends and distributions paid to any
investor (i) who has provided either an incorrect Social Security Number or
Taxpayer Identification Number or no number at all, (ii) who is subject to
withholding by the Internal Revenue Service for failure to properly include on
his return payments of interest or dividends, or (iii) who has failed to
certify to Northern Funds, when required to do so, that he is not subject to
backup withholding or that he is an "exempt recipient."
STATE AND LOCAL TAXES GENERALLY. Because your state and local taxes may be
different than the federal taxes described above, you should see your tax
adviser.
MANAGEMENT
BOARD OF TRUSTEES
The business and affairs of Northern Funds are managed under the
direction of its Board of Trustees. The Additional Statement contains the name
of each Trustee and other background information.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust, with offices at 50 S. LaSalle Street, Chicago,
Illinois 60675, serves as Northern Funds' investment
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<PAGE> 31
adviser, transfer agent and custodian. As transfer agent, Northern Trust
provides various administrative servicing functions, and any shareholder
inquiries may be directed to it. Northern Trust's transfer agency offices are
located at 801 S. Canal Street, Chicago, Illinois 60607.
Northern Trust, a member of the Federal Reserve System, is an Illinois
state-chartered commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company. Northern Trust was formed in 1889 with
capitalization of $1 million. As of December 31, 1996, Northern Trust
Corporation and its subsidiaries had approximately $21.6 billion in assets,
$13.8 billion in deposits and employed over 6,700 persons.
Northern Trust and its affiliates administered in various capacities
(including as master trustee, investment manager or custodian) over $778.9
billion in assets as of December 31, 1996, including over $130.3 billion for
which Northern Trust had investment management responsibility.
Subject to the general supervision of Northern Funds' Board of
Trustees, Northern Trust is responsible for making investment decisions for the
Fund and placing purchase and sale orders for portfolio securities. Northern
Trust is also responsible for maintaining and preserving the records required
to be maintained under the regulations of the SEC (with certain exceptions
unrelated to its activities for Northern Funds). In making investment
recommendations for the Funds, investment advisory personnel must not inquire
or take into consideration whether issuers of securities proposed for purchase
or sale for the Fund's accounts are customers of Northern Trust's commercial
banking department. These requirements are designed to prevent investment
advisory personnel for the Fund from knowing which companies have commercial
business with Northern Trust and from purchasing securities where they know the
proceeds will be used to repay loans to the bank.
As compensation for its advisory services and its assumption of
related expenses, Northern Trust is entitled to a fee, computed daily and
payable monthly, at an annual rate of .65% of the average daily net assets of
the Fund.
Northern Trust also receives compensation as Northern Funds' custodian
and transfer agent. The fees payable by the Fund for these services are
described in the Additional Statement.
The Fund is advised by Northern Trust's Investment Services Group.
James M. Snyder, Vice President of Northern Trust since 1980, Senior Vice
President since 1991, Chief Investment Officer since 1995 and Executive Vice
President since 1996, oversees the management of all fixed income, equity and
money market assets managed by Northern Trust and is the head of Northern's
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<PAGE> 32
Investment Services Group. Mr. Snyder received his B.S. degree from Indiana
University and his M.B.A. degree from DePaul University. He is a Chartered
Financial Analyst and a member of the Investment Analysts Society of Chicago.
ADMINISTRATOR AND DISTRIBUTOR
Sunstone Financial Group, Inc. ("Sunstone"), 207 E. Buffalo Street,
Suite 400, Milwaukee, Wisconsin 53202, acts as administrator for Northern
Funds. As compensation for its administrative services (which include clerical,
compliance, regulatory and other services) and the assumption of related
expenses, Sunstone is entitled to a fee, computed daily and payable monthly, at
an annual rate of .15% of Northern Funds' average net assets.
Sunstone Distribution Services, LLC, 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, an affiliate of Sunstone, serves as distributor of
the shares of Northern Funds. Miriam M. Allison and Mary M. Tenwinkel, officers
of the Funds, are also officers of Sunstone Distribution Services, LLC. Shares
of Northern Funds are sold by Sunstone Distribution Services, LLC, as
distributor, on a continuous basis. No compensation is payable by Northern
Funds to Sunstone Distribution Services, LLC for its services.
SERVICE ORGANIZATIONS
Northern Funds may enter into agreements with Service Organizations
such as banks, corporations, brokers, dealers and other financial institutions,
including Northern Trust, concerning the provision of support and/or
distribution services to their customers who own Fund shares. These services,
which are described more fully in the Additional Statement, may include support
services such as assisting investors in processing administrative purchase,
exchange and redemption requests; processing dividend and distribution payments
from the Funds; providing information to customers showing their positions in
the Fund; and providing subaccounting with respect to Fund shares beneficially
owned by customers or the information necessary for subaccounting. In addition,
Service Organizations may provide assistance, such as the forwarding of sales
literature and advertising to their customers, in connection with the
distribution of Fund shares. For their services, Service Organizations may
receive fees from the Fund at annual rates of up to .25% of the average daily
net asset value of the shares covered by their agreements.
Service Organizations may charge their customers fees for providing
administrative services in connection with investments in the Fund. In
addition, investors should contact their Service
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<PAGE> 33
Organization with respect to the availability of shareholder services and the
particular Service Organization's procedures for purchasing and redeeming
shares. It is the responsibility of Service Organizations to transmit purchase
and redemption orders and record those orders on a timely basis in accordance
with their agreements with their customers.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by Northern Funds in connection with the investment of
fiduciary funds in Fund shares. Institutions, including banks regulated by the
Comptroller of the Currency, Federal Reserve Board and state banking
commissions, and investment advisers and other money managers subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult their legal counsel before entering into
agreements with Northern Funds.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in the business of underwriting securities. It is
expected that banks will be engaged under agreements with Northern Funds only
to perform the administrative and investor servicing functions described above,
and will represent that the services provided by them under the agreements will
not be primarily intended to result in the sale of Fund shares.
Agreements that contemplate the provision of distribution services by
Service Organizations are governed by a Distribution and Service Plan (the
"Plan") that has been adopted by Northern Funds pursuant to Rule 12b-1 under
the 1940 Act. No payments are made to Sunstone under the Plan. However,
payments to Service Organizations, including affiliates of Northern Trust,
under the Plan are not tied directly to their own out-of-pocket expenses and
therefore may be used as they elect (for example, to defray their overhead
expenses), and may exceed their direct and indirect costs.
EXPENSES
Except as set forth above and in the Additional Statement, the Fund is
responsible for the payment of its expenses. These expenses include, without
limitation, the fees and expenses payable to Northern Trust and Sunstone;
brokerage fees and commissions; fees for the registration or qualification of
Fund shares under federal or state securities laws; expenses of the Fund's
organization; taxes; interest; costs of liability insurance, fidelity bonds,
indemnification or contribution; any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against,
Northern Funds for violation of any law; legal, tax and auditing fees and
expenses; expenses of preparing and printing prospectuses, statements of
additional information, proxy materials, reports
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<PAGE> 34
and notices and the printing and distributing of the same to the Fund's
shareholders and regulatory authorities; compensation and expenses of its
Trustees; payments to Service Organizations; fees of industry organizations
such as the Investment Company Institute; and miscellaneous and extraordinary
expenses incurred by Northern Funds.
Northern Trust and Sunstone intend to voluntarily reimburse a portion
of the Fund's expenses and/or reduce their advisory and administrative fees
from the Fund during the current fiscal year. The result of these
reimbursements and fee reductions will be to increase the performance of the
Fund during the periods for which the reductions and reimbursements are made.
FURTHER INFORMATION
DETERMINING SHARE PRICE
Net asset value per share for purposes of purchases and redemptions is
calculated by Northern Trust on each Business Day as of 3:00 p.m. (Chicago
Time) for the Fund. Net asset value is calculated by dividing the value of all
securities and other assets belonging to the Fund, less the liabilities charged
to the Fund, by the number of the Fund's outstanding shares.
Securities held by the Fund that are listed on a recognized U.S.
securities exchange are valued at the last quoted sales price on the securities
exchange on which the securities are primarily traded. If securities listed on
a U.S. exchange are not traded on a valuation date, they will be valued at the
last quoted bid price. Securities that are traded in the U.S. over-the-counter
markets, absent a last quoted sales price, are valued at the last quoted bid
price. Any securities for which no current quotations are readily available are
valued at fair value as determined in good faith by Northern Trust under the
supervision of the Board of Trustees. Temporary short-term investments are
valued at amortized cost which Northern Trust has determined, pursuant to Board
authorization, approximates market value. Securities may be valued on the basis
of prices provided by independent pricing services when those prices are
believed to reflect the fair market value of the securities.
ADVERTISING PERFORMANCE
The performance of the Fund may be compared to those of other mutual
funds with similar investment objectives and to stock, bond and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the performance of the Fund will be compared to the Russell Index, and
may be compared to data prepared by Lipper Analytical Services, Inc., the
Standard & Poor's 500(R) Composite Stock Price
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<PAGE> 35
Index, the Consumer Price Index or the Dow Jones Industrial Average.
Performance data as reported in national financial publications such as Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature, may also be used in comparing
the performance of the Fund.
The Fund calculates its total return on an "average annual total
return" basis for various periods from the date the Fund commences investment
operations and for other periods as permitted under SEC rules. Average annual
total return reflects the average annual percentage change in value of an
investment over the measuring period. Total return may also be calculated on an
aggregate total return basis for various periods. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return reflect changes in the price of the Fund's
shares and assume that any dividends and capital gain distributions are
reinvested. When considering average total return figures for periods longer
than one year, you should note that the annual total return for any one year
may be more or less than the average for the entire period. The Fund may also
advertise its total return on an aggregate, year-by-year or other basis for
various specified periods through charts, graphs, schedules or quotations.
If after July 31, 1997, the Small Cap Index Fund requires the payment
of an additional transaction fee amount equal to 0.75% of the amount invested,
the Fund may advertise total return data without reflecting the additional
transaction fee amount if, in accordance with the rules of the SEC, they are
accompanied by average annual total return data reflecting this fee. Quotations
which do not reflect the fee will, of course, be higher than quotations which
do.
Performance is based on historical earnings and is not intended to
indicate future performance. The investment return and principal value of an
investment in the Fund will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide a
basis for comparison with bank deposits and other investments which provide a
fixed yield for a stated period of time. Changes in the net asset value should
be considered in ascertaining the total return to shareholders for a given
period. Total return data should also be considered in light of the risks
associated with a Fund's composition, quality, operating expenses and market
conditions. Any fees charged by Northern Trust or a Service Organization
directly to its customers in connection with investments in the Fund will not
be included in Northern Funds' calculations of performance data.
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<PAGE> 36
VOTING RIGHTS
Northern Funds was formed as a Massachusetts Business Trust on October
12, 1993 under an Agreement and Declaration of Trust (the "Trust Agreement").
The Trust Agreement permits the Board of Trustees to issue an unlimited number
of shares of beneficial interest of one or more separate series representing
interests in different investment portfolios. Northern Funds currently offers
twenty-four separate funds. This Prospectus relates only to the Small Cap Index
Fund.
Shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Each Northern Fund
entitled to vote on a matter will vote in the aggregate and not by fund, except
as required by law or when the matter to be voted on affects only the interests
of shareholders of a particular series. The Additional Statement gives examples
of situations where the law requires voting by series. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate
shares of Northern Funds may elect all of the Trustees.
Northern Funds does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law.
Pursuant to the Trust Agreement, the Trustees will promptly call a meeting of
shareholders to vote upon the removal of any Trustee when so requested in
writing by the record holders of 10% or more of the outstanding shares. To the
extent required by law, Northern Funds will assist in shareholder
communications in connection with the meeting.
As of December 31, 1996, Northern Trust possessed sole or shared
voting or investment power for its customer accounts with respect to more than
50% of the outstanding shares of Northern Funds.
SHAREHOLDER REPORTS
Shareholders of record will be provided each year with a semi-annual
report showing portfolio investments and other information as of September 30
and, after the close of the Fund's fiscal year March 31, with an annual report
containing audited financial statements. To eliminate unnecessary duplication,
only one copy of shareholder reports will be sent to shareholders with the same
mailing address. Shareholders who desire a duplicate copy of shareholder
reports to be mailed to their residence should call 1-800-595-9111.
RETIREMENT PLANS
Shares of the Fund may be purchased in connection with certain
tax-sheltered retirement plans, including profit-sharing
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<PAGE> 37
plans, 401(k) plans, money purchase pension plans, target benefit plans and
individual retirement accounts. Further information about how to participate in
these plans, the fees charged and the limits on contributions can be obtained
from Northern Trust. To invest through any of the tax-sheltered retirement
plans, please call Northern Trust for information and the required separate
application. To determine whether the benefits of a tax-sheltered retirement
plan are available and/or appropriate, a shareholder should consult with a tax
adviser.
MISCELLANEOUS
The address of Northern Funds is 207 E. Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 and the telephone number is 1-800-595-9111. Northern
Funds is registered as an open-end management investment company under the 1940
Act, and the Fund is classified under that Act as a diversified portfolio.
As used in this Prospectus, "Business Day" means each day Northern
Trust and the New York Stock Exchange (the "Exchange") are open, which is
Monday through Friday, except for holidays observed by Northern Trust and/or
the Exchange. In 1997, these holidays are New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving and Christmas. On days when
Northern Trust or the Exchange closes early as a result of unusual weather or
other conditions, the right is reserved to advance the time by which purchase
and redemption requests must be received. In addition, on any Business Day when
the Public Securities Association ("PSA") recommends that the securities
markets close early, the Funds reserve the right to cease or to advance the
deadline for accepting purchase and redemption orders for same Business Day
credit up to one hour before the PSA recommended closing time. Purchase and
redemption requests received after the advanced closing time will be effected
on the next Business Day. Northern Trust is not required to calculate the net
asset value of the Fund on days during which no shares are tendered to the Fund
for redemption and no orders to purchase or sell shares are received by the
Fund, or on days on which there is an insufficient degree of trading in the
Fund's portfolio securities for changes in the value of such securities to
materially affect the net asset value per share.
From time to time, Northern Funds' distributor may provide promotional
incentives to brokers whose representatives have sold or are expected to sell
shares of the Fund. At various times, the distributor may implement programs
under which a broker's sales force may be eligible to win cash or non-cash
awards for sales efforts, and may finance broker sales contests or recognition
programs conforming to criteria established by the distributor. The distributor
may also provide marketing services
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<PAGE> 38
to brokers consisting of written informational material relating to sales
incentive campaigns conducted by such brokers for their representatives.
Northern Trust is sometimes referred to as "The Northern Trust Bank"
in advertisements and other literature.
The Small Cap Index Portfolio is not sponsored, endorsed, sold or
promoted by Russell, nor does Russell guarantee the accuracy and/or
completeness of the Russell Index or any data included therein. Russell makes
no warranty, express or implied, as to the results to be obtained by the Fund,
owners of the Fund, any person or any entity from the use of the Russell Index
or any data included therein. Russell makes no express or implied warranties
and expressly disclaims all such warranties of merchantability of fitness for a
particular purpose for use with respect to the Russell Index or any data
included therein.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE FUND'S ADDITIONAL
STATEMENT IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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<PAGE> 39
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED
FEBRUARY 26, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
33-73404
811-8236
PART B
STATEMENT OF ADDITIONAL INFORMATION
SMALL CAP INDEX FUND
NORTHERN FUNDS
(THE "TRUST")
This Statement of Additional Information (the "Additional Statement")
dated May __, 1997 is not a prospectus. This Additional Statement should be
read in conjunction with the Prospectus dated May __, 1997, as amended or
supplemented from time to time, for the Small Cap Index Fund (the "Fund") of
Northern Funds (the "Prospectus"). Copies of the Prospectus may be obtained
without charge from the transfer agent by writing to the Northern Funds Center,
P.O. Box 75986, Chicago, Illinois 60690-9069 or by calling 1-800-595-9111.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.
----------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS ADDITIONAL STATEMENT OR IN THE PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NORTHERN FUNDS OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY NORTHERN FUNDS OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE> 40
SHARES OF NORTHERN FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, THE NORTHERN TRUST BANK,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION,
FEDERAL RESERVE BOARD, OR ANY OTHERS GOVERNMENTAL AGENCY.
-2-
<PAGE> 41
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT INFORMATION...................................................................... 4
Investment Objective and Policies............................................................. 4
Investment Restrictions....................................................................... 12
ADDITIONAL TRUST INFORMATION........................................................................... 15
Trustees and Officers......................................................................... 15
Investment Adviser, Transfer Agent and Custodian.............................................. 17
Administrator and Distributor................................................................. 22
Service Organizations......................................................................... 24
Counsel and Auditors.......................................................................... 25
In-Kind Purchases............................................................................. 25
Automatic Investing Plan...................................................................... 25
Redemptions and Exchanges..................................................................... 26
PERFORMANCE INFORMATION................................................................................ 27
General Information........................................................................... 27
TAXES.................................................................................................. 30
Federal - General Information................................................................. 30
Taxation of Certain Financial Instruments ................................................... 33
DESCRIPTION OF SHARES.................................................................................. 34
OTHER INFORMATION...................................................................................... 38
APPENDIX A............................................................................................. A-1
APPENDIX B............................................................................................. B-1
</TABLE>
-3-
<PAGE> 42
ADDITIONAL INVESTMENT INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
The following supplements the investment objective and policies of the
Fund set forth in the Prospectus.
Small Cap Index Fund seeks to provide investment results approximating
the aggregate price and dividend performance of the securities
included in the Russell 2000 Small Stock Index (the "Russell Index").
COMMERCIAL PAPER, BANKERS' ACCEPTANCES, CERTIFICATES OF DEPOSIT, TIME
DEPOSITS AND BANK NOTES. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding companies,
corporations and finance companies. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return. Bankers' acceptances are
negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties that vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to deposit liabilities of the bank and pari passu with
other senior, unsecured obligations of the bank. Bank notes are classified as
"other borrowings" on a bank's balance sheet, while deposit notes and
certificates of deposit are classified as deposits. Bank notes are not insured
by the Federal Deposit Insurance Corporation or any other insurer. Deposit
notes are insured by the Federal Deposit Insurance Corporation only to the
extent of $100,000 per depositor per bank.
The Fund may invest a portion of its net assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule
Bs, which are obligations issued by Canadian branches of foreign or domestic
banks; Yankee
-4-
<PAGE> 43
Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee BAs"), which are
U.S. dollar-denominated bankers' acceptances issued by a U.S. branch of a
foreign bank and held in the United States.
REPURCHASE AGREEMENTS. The Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Repurchase agreements are considered to be loans under the
Investment Company Act of 1940 (The "1940 Act"). Although the securities
subject to a repurchase agreement may bear maturities exceeding one year,
settlement for the repurchase agreement will never be more than one year after
the Fund's acquisition of the securities and normally will be within a shorter
period of time. Securities subject to repurchase agreements are held either by
Northern Funds' custodian or subcustodian (if any), or in the Federal
Reserve/Treasury Book- Entry System. The seller under a repurchase agreement
will be required to maintain the value of the securities subject to the
agreement in an amount exceeding the repurchase price (including accrued
interest). Default by the seller would, however, expose the Fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price
("reverse repurchase agreements"). Reverse repurchase agreements are considered
to be borrowings under the 1940 Act. Reverse repurchase agreements involve the
risk that the market value of the securities sold by the Fund may decline below
the repurchase price. The Fund will pay interest on amounts obtained pursuant
to a reverse repurchase agreement. While reverse repurchase agreements are
outstanding, the Fund will maintain in a segregated account liquid assets of an
amount at least equal to the market value of the securities, plus accrued
interest, subject to the agreement.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to the variable
and floating rate instruments that may be acquired by the Fund as described in
its Prospectus, Northern Trust will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and,
if the instruments are subject to demand features, will monitor their financial
status to meet payment on demand. Where necessary to ensure that a variable or
floating rate instrument is of the minimum required credit quality for the
Fund, the issuer's obligation to pay the principal of the instrument will be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend.
-5-
<PAGE> 44
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. The Fund may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to
purchase or sell securities at a future date. The price of the underlying
securities and the date when the securities will be delivered and paid for (the
settlement date) are fixed at the time the transaction is negotiated.
When-issued purchases and forward commitment transactions are normally
negotiated directly with the other party.
The Fund will purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or negotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date.
When the Fund purchases securities on a when-issued, delayed-delivery
or forward commitment basis, the Fund's custodian will maintain in a segregated
account liquid assets having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
to sell portfolio securities, the custodian will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding. These
procedures are designed to ensure that the Fund will maintain sufficient assets
at all times to cover its obligations under when-issued purchases, forward
commitments and delayed-delivery transactions.
UNITED STATES GOVERNMENT OBLIGATIONS. To the extent consistent with
its investment objective, the Fund may invest in a variety of U.S. Treasury
obligations consisting of bills, notes and bonds, which principally differ only
in their interest rates, maturities and issuance dates. The Fund may also
invest in other securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Examples of the types of U.S. Government
obligations that may be acquired by the Fund include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), General Services
Administration, Student Loan Marketing Association ("SLMA"), Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Intermediate Credit Banks and Maritime Administration.
-6-
<PAGE> 45
Obligations of certain agencies and instrumentalities, such as GNMA,
are supported by the full faith and credit of the U.S. Treasury; others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the Treasury; others, such as those of FNMA,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of SLMA, are supported
only by the credit of the instrumentalities. No assurance can be given that the
U.S. Government would provide financial support to its agencies or
instrumentalities if it is not obligated to do so by law. Obligations of the
International Bank for Reconstruction and Development (also known as the World
Bank) are supported by subscribed, but unpaid, commitments of its member
countries. There is no assurance that these commitments will be undertaken or
complied with in the future.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities are deemed to include (a)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or an agency or
instrumentality thereof, and (b) participations in loans made to foreign
governments or their agencies that are so guaranteed. The secondary market for
certain of these participations is limited. Such participations will therefore
be regarded as illiquid. No assurance can be given that the U.S. Government
would provide financial support to its agencies or instrumentalities if it is
not obliged to do so by law.
STRIPPED OBLIGATIONS. To the extent consistent with its investment
objective, the Fund may purchase Treasury receipts and other "stripped"
securities that evidence ownership in either the future interest payments or
the future principal payments on U.S. Government and other obligations. These
participations, which may be issued by the U.S. Government (or a U.S.
Government agency or instrumentality) or by private issuers such as banks and
other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities,
particularly SMBS, may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool
of mortgage-backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class receives all of the
principal. However, in some cases, one class will receive some of the interest
and most of the principal while the other class will receive most of the
interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment. The market value of the class
consisting entirely of
-7-
<PAGE> 46
principal payments can be extremely volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
are generally higher than prevailing market yields on other mortgage-backed
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or
instrumentality) may be considered liquid under guidelines established by
Northern Funds' Board of Trustees if they can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of the Fund's per share net asset value.
OPTIONS. The Fund may buy put options and buy call options and write
covered call and secured put options. Such options may relate to particular
securities, stock indices, financial instruments, and may or may not be listed
on a securities exchange ("Exchange") and may or may not be issued by the
Options Clearing Corporation. Options trading is a highly specialized activity
which entails greater than ordinary investment risk. Options may be more
volatile than the underlying instruments, and therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves.
A call option for a particular security gives the purchaser of the
option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of
the option, regardless of the market price of the security. The premium paid to
the writer is in consideration for undertaking the obligation under the option
contract. A put option for a particular security gives the purchaser the right
to sell the security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
Options on indices and yield curve options provide the holder with the right to
make or receive a cash settlement upon exercise of the option. With respect to
options on indices, the amount of the settlement will equal the difference
between the closing price of the index at the time of exercise and the exercise
price of the option expressed in dollars, times a specified multiple. With
respect to yield curve options, the amount of the settlement will equal the
difference between the yields of designated securities.
The Fund will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if the
Fund owns the instrument underlying the call or has an absolute and immediate
right to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, liquid assets, in such amount as are
held in a segregated account by its custodian) upon conversion or
-8-
<PAGE> 47
exchange of other securities held by it. For a call option on an index, the
option is covered if the Fund maintains with its custodian a diversified
portfolio of securities comprising the index or liquid assets equal to the
contract value. A call option is also covered if the Fund holds a call on the
same instrument or index as the call written where the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. The Fund will write put options only if they are "secured"
by liquid assets maintained in a segregated account by the Fund's custodian in
an amount not less than the exercise price of the option at all times during
the option period.
The Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase an instrument subject to a secured put
option written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying instrument, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying instrument from being
called, to permit the sale of the underlying instrument or to permit the
writing of a new option containing different terms on such underlying
instrument. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Fund will have incurred a loss in the transaction. There is no assurance
that a liquid secondary market will exist for any particular option. An option
writer, unable to effect a closing purchase transaction, will not be able to
sell the underlying instrument (in the case of a covered call option) or
liquidate the segregated account (in the case of a secured put option) until
the option expires or the optioned instrument or currency is delivered upon
exercise with the result that the writer in such circumstances will be subject
to the risk of market decline or appreciation in the instrument during such
period.
When the Fund purchases an option, the premium paid by it is recorded
as an asset of the Fund. When the Fund writes an option, an amount equal to the
net premium (the premium less the commission) received by the Fund is included
in the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by the Fund expires
-9-
<PAGE> 48
unexercised, the Fund realizes a loss equal to the premium paid. If the Fund
enters into a closing sale transaction on an option purchased by it, the Fund
will realize a gain if the premium received by the Fund on the closing
transaction is more than the premium paid to purchase the option, or a loss if
it is less. If an option written by the Fund expires on the stipulated
expiration date or if the Fund enters into a closing purchase transaction, the
Fund will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by the
Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In addition, a
liquid secondary market for particular options, whether traded over-the-counter
or on an Exchange may be absent for reasons which include the following: there
may be insufficient trading interest in certain options; restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities or currencies;
unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading value; or one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that Exchange would continue to be exercisable in accordance with
their terms.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may purchase and sell
futures contracts and may purchase and sell call and put options on futures
contracts. For a detailed description of futures contracts and related options,
see Appendix B to this Additional Statement.
SECURITIES LENDING. Collateral for loans of portfolio securities made
by the Fund may consist of cash, securities issued or guaranteed by the U.S.
Government or its agencies or irrevocable bank letters of credit (or any
combination thereof). The borrower of securities will be required to maintain
the market value of the collateral at not less than the market value of the
loaned securities, and such value will be monitored on a daily basis.
-10-
<PAGE> 49
When the Fund lends its securities, it continues to receive dividends and
interest on the securities loaned and may simultaneously earn interest on the
investment of the cash collateral. Although voting rights, or rights to
consent, attendant to securities on loan pass to the borrower, such loans will
be called so that the securities may be voted by the Fund if a material event
affecting the investment is to occur.
INVESTMENT COMPANIES. The Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made, not more
than 3% of the total outstanding stock of any one investment company will be
owned by Northern Funds as a whole and their affiliated persons (as defined in
the 1940 Act). An investment company whose securities are purchased by the Fund
or other portfolios of Northern Funds is not obligated to redeem such
securities in an amount exceeding 1% of the investment company's total
outstanding securities during any period of less than 30 days. Therefore, such
securities that exceed this amount may be illiquid.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in equity real
estate investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may
subject the Fund to certain risks. REITs may be affected by changes in the
value of the underlying property owned by the trust. REITs are dependent upon
specialized management skill, may not be diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation and the possibility of
failing to qualify for the beneficial tax treatment available to REITs under
the Internal Revenue Code of 1986, as amended, and to maintain exemption from
the 1940 Act. As a shareholder in a REIT, the Fund would bear, along with other
shareholders, its pro rata portion of the REIT's operating expenses. These
expenses would be in addition to the advisory and other expenses the Fund bears
directly in connection with its own operations.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate
for the Fund is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
which enable the Funds to receive favorable tax treatment.
-11-
<PAGE> 50
MISCELLANEOUS. The Fund will not normally engage in the trading of
securities for short-term profits. However, the Fund is not restricted by
policy with regard to portfolio turnover and will make changes in its
investment portfolio from time to time as business and economic conditions as
well as market prices may dictate. Securities may be purchased on margin only
to obtain such short-term credits as are necessary for the clearance of
purchases and sales of securities. The Fund will not engage in selling
securities short. The Fund may, however, make short sales against the box
although the Fund has no current intention to do so in the coming year.
"Selling short against the box" involves selling a security that the Fund owns
for delivery at a specified date in the future.
INVESTMENT RESTRICTIONS
The Fund is subject to the fundamental investment restrictions
enumerated below which may be changed with respect to the Fund only by a vote
of the holders of a majority of the Fund's outstanding shares.
The Fund may not:
(1) Make loans, except (a) through the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) through repurchase agreements with banks, brokers,
dealers and other financial institutions, and (c) loans of securities.
(2) Mortgage, pledge or hypothecate any assets (other than
pursuant to reverse repurchase agreements) except to secure permitted
borrowings.
(3) Purchase or sell real estate or real estate limited
partnerships, but this restriction shall not prevent the Fund from
investing directly or indirectly in portfolio instruments secured by
real estate or interests therein or acquiring securities of real
estate investment trusts or other issuers that deal in real estate.
(4) Purchase or sell commodities or commodity contracts or
oil or gas or other mineral exploration or development programs or
leases, except that the Fund may, to the extent appropriate to its
investment policies, purchase securities of companies engaging in
whole or in part in such activities, and may enter into futures
contracts and related options and enter into forward currency exchange
contracts in accordance with its investment objective and policies.
(5) Invest in companies for the purpose of exercising control.
-12-
<PAGE> 51
(6) Act as underwriter of securities, except as the Fund may
be deemed to be an underwriter under the Securities Act of 1933 (the
"1933 Act") in connection with the purchase and sale of portfolio
instruments in accordance with its investment objective and portfolio
management policies.
(7) Write puts, calls or combinations thereof, except for
transactions in options on securities, financial instruments,
currencies and indices of securities; futures contracts; options on
futures contracts; forward currency exchange contracts; short sales
against the box; interest rate and currency swaps; and pair-off
transactions.
(8) Purchase the securities of any issuer if such purchase
would cause more than 10% of the voting securities of such issuer to
be held by the Fund, except that up to 25% of the value of its total
assets may be invested without regard to this 10% limitation.
In addition, as summarized in the Prospectus, the Fund may not:
(9) Purchase securities (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements collateralized by such obligations) if such
purchase would cause more than 25% in the aggregate of the market
value of the total assets of the Fund to be invested in the securities
of one or more issuers having their principal business activities in
the same industry. For the purposes of this restriction, state and
municipal governments and their agencies and authorities are not
deemed to be industries; as to utility companies, the gas, electric,
water and telephone businesses are considered separate industries;
personal credit finance companies and business credit finance
companies are deemed to be separate industries; and wholly-owned
finance companies are considered to be in the industries of their
parents if their activities are primarily related to financing the
activities of their parents.
(10) Borrow money (other than pursuant to reverse repurchase
agreements), except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's total assets or
(b) from banks, provided that immediately after any such borrowing all
borrowings of the Fund do not exceed one-third of the Fund's total
assets. The exceptions in (a) and (b) to this restriction are not for
investment leverage purposes but are solely for extraordinary or
emergency purposes or to facilitate management of the Fund by enabling
Northern Funds to meet redemption requests when the liquidation of
portfolio instruments is deemed to be disadvantageous or not possible.
If due to market
-13-
<PAGE> 52
fluctuations or other reasons the total assets of the Fund fall below
300% of its borrowings, Northern Funds will reduce the borrowings of
the Fund in accordance with the 1940 Act. In addition, as a matter of
fundamental policy, the Fund may not enter into reverse repurchase
agreements exceeding in the aggregate one-third of its total assets.
(11) Purchase the securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, if immediately after such purchase more than 5%
of the value of the Fund's total assets would be invested in such
issuer, except that: (a) up to 25% of the value of the total assets of
the Fund may be invested in any securities without regard to this 5%
limitation; and (b) such 5% limitation shall not apply to repurchase
agreements collateralized by obligations of the U.S. Government, its
agencies or instrumentalities.
In addition, as a matter of fundamental policy, the Fund will not
issue senior securities except as stated in the Prospectus or this Additional
Statement.
Except as otherwise provided in Investment Restriction (9), for the
purpose of such restriction in determining industry classification with respect
to the Fund, Northern Funds intends to use the industry classification titles
in the Standard Industrial Classification Manual. Securities held in escrow or
separate accounts in connection with the Fund's investment practices described
in this Additional Statement and in the Prospectus are not deemed to be
mortgaged, pledged or hypothecated for purposes of the foregoing Investment
Restrictions.
A security is considered to be issued by the entity, or entities,
whose assets and revenues back the security. A guarantee of a security is not
deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Fund, does
not exceed 10% of the value of the Fund's total assets.
Each Investment Restriction which involves a maximum percentage (other
than the restriction set forth above in Investment Restriction (10)) will not
be considered violated unless an excess over the percentage occurs immediately
after, and is caused by, an acquisition or encumbrance of securities or assets
of the Fund. The 1940 Act requires that if the asset coverage for borrowings at
any time falls below the limits described in Investment Restriction (10), the
Fund will, within three days thereafter (not including Sundays and holidays),
reduce the amount of its borrowings to an extent that the net asset coverage of
such borrowings shall conform to such limits.
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<PAGE> 53
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of Northern Funds
is set forth below.
Mr. Silas S. Cathcart,*,** Chairman of the Board and President, Age
71, 222 Wisconsin Avenue, Lake Forest, Illinois 60045. Chairman of Kidder
Peabody Inc. from May 1987 until his retirement in December 1989.
Director/Trustee of General Electric Co., Baxter International, Inc. (worldwide
development, distribution and manufacture of health care products, systems and
services), The Quaker Oats Co., Montgomery Ward and American Academics, Inc.,
Retired Director and Trustee of Illinois Tool Works, Inc. and Bradley Trust,
respectively.
Mr. James W. Cozad, Trustee, Age 70, 205 N. Michigan Avenue, Suite
4310, Chicago, Illinois 60601. Vice Chairman of Amoco Corporation from
September 1983 to December 1989 and Chairman and CEO of Whitman Corporation
(holding company for Pepsi-Cola General Bottlers, Inc., Midas International
Corporation (automotive services) and Hussmann Corporation (refrigeration
systems and equipment) from January 1990 until his retirement in May 1992.
Director of Whitman Corporation, Inland Steel Company and Inland Steel
Industries, Inc. Retired Director of GATX Corporation (transportation,
distribution and warehousing), Sears, Roebuck & Company and Eli Lilly and
Company (life science products).
Ms. Susan Crown,** Trustee, Age 38, 222 North LaSalle Street, Suite
2000, Chicago, Illinois 60601. Vice President of Henry Crown and Company
(family-owned and operated company including diversified manufacturing
companies and real estate development) since 1984. Director and President of
Arie and Ida Crown Memorial (grant-making foundation), Director of Baxter
International, Inc. (worldwide development, distribution and manufacture of
health care products, systems and services) and Illinois Tool Works, Inc.
Mr. Wesley M. Dixon, Jr.,* Trustee, Age 69, 400 Skokie Blvd., Suite
675, Northbrook, Illinois 60062. Director of Earl Kinship Capital Corporation
since 1985. Vice Chairman and Director of G.D. Searle & Co. (manufacture and
sale of food products and pharmaceuticals) from 1977 to 1983 and President of
G.D. Searle & Co. prior thereto.
- -------------
* Messrs. Cathcart and Dixon are first cousins.
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<PAGE> 54
Mr. William J. Dolan, Jr., Trustee, Age 64, 1534 Basswood Circle,
Glenview, Illinois 60025. Partner of Arthur Andersen & Co. S.C. (accounting
firm) from 1966 until his retirement in December 1989. Financial Consultant,
Ernst & Young from 1992 to 1993. Director of Former Household Bank, Federal
Savings Bank.
Mr. Raymond E. George, Jr.,** Trustee, Age 66, 703 Prospect Avenue,
Winnetka, Illinois 60093. Senior Vice President and Senior Fiduciary Officer of
The Northern Trust Company from 1988 until his retirement in October 1993.
Miriam M. Allison, Vice President and Treasurer, Age 48, 207 E.
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. President and Director
of Sunstone Financial Group, Inc. since 1990, President of Sunstone
Distribution Services, LLC since October of 1996 and Vice President of First
Wisconsin Trust Company prior thereto.
Mary M. Tenwinkel, Vice President, Age 48, 207 E. Buffalo Street,
Suite 400, Milwaukee, Wisconsin 53202. Vice President of Sunstone Financial
Group, Inc. since August of 1993, Vice President of Sunstone Distribution
Services, LLC since October of 1996 and First Vice President and head of
Personal Services Group at Firstar Trust Company prior thereto.
Anita M. Zagrodnik, Assistant Treasurer, Age 36, 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202. Client Services, Accounting and
Tax Manager of Sunstone Financial Group, Inc. since 1990, Vice President of
Sunstone Investor Services, LLC since January of 1997, and Senior Accountant at
Price Waterhouse prior thereto.
Jeffrey A. Dalke, Secretary, Age 46, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107. Partner in
the law firm of Drinker Biddle & Reath.
Certain of the Trustees and officers and the organizations with which
they are associated have had in the past, and may have in the future,
transactions with Northern Trust, Sunstone and their respective affiliates.
Northern Funds has been advised by such Trustees and officers that all such
transactions have been and are expected to be in the ordinary course of
business and the terms of such transactions, including all loans and loan
commitments by such persons, have been and are expected to be substantially the
same as the prevailing terms for comparable transactions for other
- --------
** Messrs. Cathcart and George and Ms. Crown are considered to
be "interested persons" of Northern Funds as defined in the
1940 Act.
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<PAGE> 55
customers. Ms. Allison holds similar positions with one or more investment
companies that are distributed by Sunstone. As a result of the responsibilities
assumed by Northern Trust under its Advisory Agreement, Transfer Agency
Agreement and Custodian Agreement and by Sunstone under its Administration
Agreement and Distribution Agreement, Northern Funds itself requires no
employees.
Each Trustee earns an annual fee of $15,000 and an additional fee of
$1,250 for each meeting attended, plus reimbursement of expenses incurred as a
Trustee. The Chairman of the Board earns an annual fee of $20,000 and an
additional fee of $1,250 for each meeting attended, plus reimbursement of
expenses incurred as a Trustee. Northern Funds' officers do not receive fees
from Northern Funds for services in such capacities, although Sunstone, of
which Mmes. Allison and Tenwinkel are also officers, receives fees from
Northern Funds for administrative services. Drinker Biddle & Reath, of which
Mr. Dalke is a partner, receives legal fees as counsel to Northern Funds.
For the fiscal year ended March 31, 1997, the Trustees received the
following compensation:
<TABLE>
<CAPTION>
===================================================================================================
Pension or
Retirement
Benefits Total
Aggregate Accrued as Part Compensation
Compensation of Trust from the
Name of Trustee from the Trust Expense Trust**
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Silas S. Cathcart None
- -----------------------------------------------------------------------------------------------------
James W. Cozad None
- -----------------------------------------------------------------------------------------------------
Susan Crown None
- -----------------------------------------------------------------------------------------------------
Wesley M. Dixon, Jr. None
- -----------------------------------------------------------------------------------------------------
William J. Dolan, Jr. None
- -----------------------------------------------------------------------------------------------------
Raymond E. George, Jr. None
=====================================================================================================
</TABLE>
** This column presents the same information as the first column because none
of the Trustees served on a board of another mutual fund related to the Trust.
INVESTMENT ADVISER, TRANSFER AGENT AND CUSTODIAN
Northern Trust is a wholly-owned subsidiary of The Northern Trust
Corporation, a Chicago-based multi-bank holding company with subsidiaries in
Illinois, Florida, New York, Arizona, California and Texas. Northern Trust has
for more than 100 years managed the assets of individuals, charitable
organizations, foundations and
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<PAGE> 56
large corporate investors. One of the nation's leading providers of trust and
investment management services, Northern Trust first entered the mutual fund
business in 1983 by offering money market funds to institutional clients. As
part of its investment advisory services, Northern Trust offers extensive
research services to its clients. As of the date of this Additional Statement,
nearly 300 financial institutions nationwide purchase Northern Trust's economic
advisory services. As of December 31, 1996, Northern Trust Corporation had
approximately $21.6 billion in assets and $13.8 billion in deposits. Northern
Trust and its affiliates administered in various capacities (including master
trustee, investment manager or custodian) $778.9 billion in assets as of
December 31, 1996, including $130.3 billion for which Northern Trust had
management responsibility. Northern Trust is one of the strongest banking
organizations in the United States and its clients include public and private
retirement funds, endowments, foundations, trusts, corporations and
individuals. Northern Funds complements the banking and personal trust services
available through Northern Trust by allowing Northern Trust's banking and trust
clients to consolidate the management of their finances and thereby move one
step closer to one-stop financial shopping. Northern Funds utilizes a
state-of-the-art investor services center. Also, trained investment
representatives are available at Northern Trust's offices to assist investors
in allocating their investments. Northern Trust believes it has built its
organization by serving clients with integrity, a commitment to quality, and
personal attention. Its stated mission with respect to all its financial
products and services is to achieve unrivaled client satisfaction. Northern
Trust manages the Funds through a team of professionals, led by portfolio
managers who follow a disciplined process to develop investment strategies. The
purpose of this approach is to promote consistent management. The portfolio
managers draw upon the resources of Northern Trust's research department with
specialists in economic analysis, investment strategy, credit quality and tax
law, and which supplies information on interest rates, GNP growth, corporate
profits and other factors.
Subject to the general supervision of the Board of Trustees, Northern
Trust makes decisions with respect to and places orders for all purchases and
sales of portfolio securities for the Funds, and also provides certain
ancillary services. Northern Trust's Advisory Agreement with Northern Funds has
been approved by the Board of Trustees, including the "non-interested"
Trustees, and the initial shareholder of Northern Funds. The Advisory Agreement
provides that in executing portfolio transactions and in selecting brokers or
dealers (a) with respect to common and preferred stocks, Northern Trust shall
use its best judgment to obtain the best overall terms available, and (b) with
respect to other securities, Northern Trust shall attempt to obtain best net
price and execution. Transactions on U.S. stock exchanges involve the payment
of negotiated brokerage commissions. On exchanges on which
-18-
<PAGE> 57
commissions are negotiated, the cost of transactions may vary among different
brokers.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when Northern Trust
believes such practice to be in the Fund's interests.
Northern Trust's investment advisory duties for Northern Funds are
carried out through its Trust Department. On occasions when Northern Trust
deems the purchase or sale of a security to be in the best interests of the
Fund as well as other fiduciary or agency accounts managed by it (including any
other portfolio, investment company or account for which Northern Trust acts as
adviser), the Agreement provides that Northern Trust, to the extent permitted
by applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
accounts in order to obtain the best overall terms available with respect to
common and preferred stocks and the best net price and execution with respect
to other securities. In such event, allocation of the securities so purchased
or sold, as well as the expenses incurred in the transaction, will be made by
Northern Trust in the manner it considers to be most equitable and consistent
with its fiduciary obligations to the Fund and other accounts involved. In some
instances, this procedure may adversely affect the size of the position
obtainable for the Fund or the amount of the securities that are able to be
sold for the Fund. To the extent that the execution and price available from
more than one broker or dealer are believed to be comparable, the Agreement
permits Northern Trust, at its discretion but subject to applicable law, to
select the executing broker or dealer on the basis of Northern Trust's opinion
of the reliability and quality of such broker or dealer.
The Advisory Agreement provides that Northern Trust may render similar
services to others so long as its services under such Agreement are not
impaired thereby. The Advisory Agreement also provides that Northern Funds will
indemnify Northern Trust against certain liabilities (including liabilities
under the federal securities laws relating to untrue statements or omissions of
material fact and actions that are in accordance with the terms of the
Agreement) or, in lieu thereof, contribute to resulting losses.
From time to time, Northern Trust may voluntarily waive a portion or
all of its fees otherwise payable to it with respect to the Funds.
Under its Transfer Agency Agreement with Northern Funds, Northern
Trust has undertaken, among other things, to perform the following services:
(1) answer shareholder inquiries and respond
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<PAGE> 58
to requests for information regarding Northern Funds; (2) process purchase and
redemption transactions; (3) establish and maintain shareholder accounts and
subaccounts; (4) furnish confirmations in accordance with applicable law, and
provide periodic account statements to each shareholder; (5) furnish proxy
statements and proxies, annual and semi-annual financial statements, and
dividend, distribution and tax notices to shareholders; (6) act as income
disbursing agent; and (7) maintain appropriate records relating to its
services. Northern Trust may appoint one or more sub-transfer agents in the
performance of its services.
As compensation for the services rendered by Northern Trust under the
Transfer Agency Agreement and the assumption by Northern Trust of related
expenses, Northern Trust is entitled to a fee from Northern Funds, payable
monthly, at an annual rate of .10% of the average daily net asset value of the
Fund.
Northern Trust maintains custody of the assets of the Fund pursuant to
the terms of its Custodian Agreement with Northern Funds. Under the terms of
this agreement, Northern Trust (l) holds the Fund's cash and securities, (2)
maintains such cash and securities in separate accounts in the name of the
Fund, (3) makes receipts and disbursements of funds on behalf of the Fund, (4)
receives, delivers and releases securities on behalf of the Fund, (5) collects
and receives all income, principal and other payments in respect of the Fund's
investments held by Northern Trust under the agreement, and (6) maintains the
accounting records of Northern Funds. Northern Trust may employ one or more
subcustodians under the Custody Agreement, provided that Northern Trust shall
have no more responsibility or liability to Northern Funds on account of any
action or omission of any subcustodian so employed than such subcustodian has
to Northern Trust and that the responsibility or liability of the subcustodian
to Northern Trust shall conform to the resolution of the Trustees of Northern
Funds authorizing the appointment of the particular subcustodian. Northern
Trust may also appoint an agent to carry out such of the provisions of the
Custody Agreement as Northern Trust may from time to time direct.
As compensation for the services rendered to the Fund under the
Custodian Agreement, and the assumption by Northern Trust of certain related
expenses, Northern Trust is entitled to payment from the Fund as follows: (a) a
basic custodial fee of (i) $18,000 annually for the Fund, plus (ii) 1/100th of
1% annually of the Fund's average daily net assets to the extent they exceed
$100 million, plus (b) a basic accounting fee of (i) $25,000 annually for the
Fund, plus (ii) 1/100th of 1% annually of the Fund's average daily net assets
to the extent they exceed $50 million, plus (c) a fixed dollar fee for each
trade in portfolio securities, plus (d) a fixed dollar fee for each time that
Northern Trust as Custodian receives or transmits funds via wire, plus (e)
reimbursement of expenses incurred by Northern Trust as Custodian for
telephone, postage, courier fees, office supplies and
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duplicating. The fees referred to in clauses (c) and (d) are subject to annual
upward adjustments based on increases in the Consumer Price Index for All Urban
Consumers, provided that Northern Trust may permanently or temporarily waive
all or any portion of any upward adjustment.
Unless sooner terminated, each of the Advisory Agreement, Transfer
Agency Agreement and Custodian Agreement between Northern Trust and Northern
Funds will continue in effect with respect to a the Fund until March 31, 1998,
and thereafter for successive 12-month periods, provided that the continuance
is approved at least annually (a) by the vote of a majority of the Trustees who
are not parties to the agreement or "interested persons" (as such term is
defined in the 1940 Act) of any party thereto, cast in person at a meeting
called for the purpose of voting on such approval and (b) by the Trustees or by
the vote of a majority of the outstanding shares of the Fund (as defined under
"Organization" in the Prospectus). Each agreement is terminable at any time
without penalty by Northern Funds (by specified Trustee or shareholder action)
on 60 days' written notice to Northern Trust and by Northern Trust on 60 days'
written notice to Northern Funds.
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company
continuously engaged in the issuance of its shares, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to
such an investment company, or from purchasing shares of such a company as
agent for and upon the order of customers. Northern Trust believes that it may
perform the services contemplated by its agreements with Northern Funds without
violation of such banking laws or regulations, which are applicable to it. It
should be noted, however, that future changes in either federal or state
statutes and regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of current and future statutes and regulations,
could prevent Northern Trust from continuing to perform such services for
Northern Funds.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of Northern Trust in connection with the provision
of services on behalf of Northern Funds, Northern Funds might be required to
alter materially or discontinue its arrangements with Northern Trust and change
its method of operations. It is not anticipated, however, that any change in
Northern Funds' method of operations would affect the net asset value per share
of the Fund or result in a financial loss to any shareholder. Moreover, if
current restrictions preventing a bank from legally sponsoring, organizing,
controlling or distributing
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shares of an open-end investment company were relaxed, Northern Funds expects
that Northern Trust would consider the possibility of offering to perform some
or all of the services now provided by Sunstone. It is not possible, of course,
to predict whether or in what form such restrictions might be relaxed or the
terms upon which Northern Trust might offer to provide services for
consideration by the Trustees.
In the Advisory Agreement, Northern Trust agrees that the name
"Northern" may be used in connection with Northern Funds' business on a
royalty-free basis. Northern Trust has reserved to itself the right to grant
the non-exclusive right to use the name "Northern" to any other person. The
Advisory Agreement provides that at such time as the Agreement is no longer in
effect, Northern Funds will cease using the name "Northern."
ADMINISTRATOR AND DISTRIBUTOR
Under its Administration Agreement, Sunstone has agreed, subject to
the direction and control of Northern Funds' Board of Trustees and utilizing
information provided by Northern Funds and its agents, to (1) provide office
space, facilities, equipment and personnel to carry out its services; (2)
compile data for and prepare with respect to the Funds timely Notices to the
Securities and Exchange Commission ("SEC") required pursuant to Rule 24f-2
under the 1940 Act and Semi-Annual Reports on Form N-SAR; (3) prepare for
execution by Northern Funds and file all federal income and excise tax returns
and state income tax returns (and such other required tax filings as may be
agreed to by the parties) other than those required to be made by Northern
Funds' custodian and transfer agent; (4) prepare compliance filings relating to
the registration of the securities of the Fund pursuant to state securities
laws with the advice of Northern Funds' counsel; (5) assist the Fund
accountants with preparing the Annual and Semi-Annual Reports required pursuant
to Section 30(d) under the 1940 Act; (6) assist to the extent requested by
Northern Funds with the preparation of the Registration Statement for the Fund
(on Form N-1A or any replacement therefor) and any amendments thereto, and
proxy materials; (7) prepare and monitor the Fund's expense accruals and cause
all appropriate expenses to be paid from Fund assets on proper authorization
from the Fund; (8) assist in the acquisition of the Fund's fidelity bond
required by the 1940 Act, monitor the amount of the bond and make the necessary
SEC filings related thereto; (9) from time to time as Northern Funds may
reasonably request or as Sunstone deems appropriate, check the Fund's
compliance with the policies and limitations relating to portfolio investments
as set forth in the Prospectus, Additional Statement and Declaration of Trust
and monitor the Fund's status as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended (but this function shall
not relieve the Fund's investment adviser of its primary day-to-day
responsibility for assuring such compliance); (10) maintain, and/or coordinate
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with the other service providers the maintenance of, the accounts, books and
other documents required pursuant to Rule 31a-1(a) and (b) under the 1940 Act;
and (11) generally assist in the Fund's administrative operations. In addition,
Sunstone has agreed to monitor Northern Funds' arrangements with respect to
services provided by Service Organizations. Under the Administration Agreement,
Sunstone is not liable for any error of judgment or mistake of law or for any
loss suffered by the Fund in connection with the performance of the
Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of Sunstone in the performance of its
duties or from its reckless disregard of its duties and obligations under the
Agreement.
Unless sooner terminated the Administration Agreement will continue in
effect with respect to the Fund until March 31, 1998, and thereafter for
successive 12-month periods, provided that the agreement is approved annually
(a) by the vote of a majority of the Trustees who are not parties to the
agreement or "interested persons" (as such term is defined by the 1940 Act) of
any party thereto, cast in person at a meeting called for the purpose of voting
on such approval, and (b) by the Trustees or by the vote of a majority of the
outstanding shares of the Fund (as defined under "Description of Shares").
Notwithstanding the foregoing, unless Sunstone shall have previously received
at least ninety (90) days' written notice of the Board of Trustees'
determination not to renew the Administration Agreement, the Agreement shall
continue automatically for an indefinite period unless the Board of Trustees
shall have provided Sunstone with at least 90 days' written notice of its
determination not to renew the Agreement.
For its administration services, Sunstone is entitled to an
administration fee, computed daily and payable monthly, at the annual rate of
.15% of the Fund's average aggregate daily net assets.
Northern Funds has also entered into a Distribution Agreement under
which Sunstone Distribution Services, LLC, as agent, sells shares of the Fund
on a continuous basis. Sunstone Distribution Services, LLC pays the cost of
printing and distributing prospectuses to persons who are not shareholders of
Northern Funds (excluding preparation and typesetting expenses) and of certain
other distribution efforts. No compensation is payable by Northern Funds to
Sunstone Distribution Services, LLC for such distribution services. Sunstone
Distribution Services, LLC is an affiliate of Sunstone. Miriam M. Allison, Vice
President and Treasurer of Northern Funds, and Mary M. Tenwinkel, Vice
President of Northern Funds, have been President and Vice President,
respectively, of Sunstone Distribution Services, LLC since October of 1996.
The Administration Agreement and the Distribution Agreement
provide that Sunstone and Sunstone Distribution Services, LLC,
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respectively, may render similar services to others so long as its services
under the Agreements are not impaired thereby. The Administration and
Distribution Agreements provide that Northern Funds will indemnify Sunstone and
Sunstone Distribution Services, LLC, respectively, against certain liabilities
(including liabilities under the federal securities laws relating to untrue
statements or omissions of material fact and actions that are in accordance
with the terms of such Agreements) under certain circumstances.
SERVICE ORGANIZATIONS
As stated in the Fund's Prospectus, the Fund may enter into agreements
from time to time with Service Organizations providing for support and/or
distribution services to customers of the Service Organizations who are the
beneficial owners of Fund shares. Under the agreements, the Fund may pay
Service Organizations up to .25% (on an annualized basis) of the average daily
net asset value of the shares beneficially owned by their customers. Support
services provided by Service Organizations under their agreements may include:
(a) processing dividend and distribution payments from the Fund; (b) providing
information periodically to customers showing their share positions; (c)
arranging for bank wires; (d) responding to customer inquiries; (e) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for subaccounting; (f) forwarding shareholder
communications; (g) assisting in processing share purchase, exchange and
redemption requests from customers; (h) assisting customers in changing
dividend options, account designations and addresses; and (i) other similar
services requested by the Fund. In addition, Service Organizations may provide
assistance (such as the forwarding of sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
The Fund's arrangements with Service Organizations under the
agreements are governed by two Plans (a Service Plan and a Distribution and
Service Plan), which have been adopted by the Board of Trustees and (in the
case of the Distribution and Service Plan) by the initial shareholder of the
Fund. Because the Distribution and Service Plan contemplates the provision of
services related to the distribution of Fund shares (in addition to support
services), that Plan has been adopted in accordance with Rule 12b-1 under the
1940 Act. In accordance with the Plans, the Board of Trustees reviews, at least
quarterly, a written report of the amounts expended in connection with the
Fund's arrangements with Service Organizations and the purposes for which the
expenditures were made. In addition, the Fund's arrangements with Service
Organizations must be approved annually by a majority of the Trustees,
including a majority of the Trustees who are not "interested persons" of the
Fund as defined in the 1940 Act and have no direct or indirect financial
interest in such arrangements (the "Disinterested Trustees").
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<PAGE> 63
The Board of Trustees believes that there is a reasonable likelihood
that their arrangements with Service Organizations will benefit the Fund and
its shareholders. Any material amendment to the arrangements with Service
Organizations under the agreements must be approved by a majority of the Board
of Trustees (including a majority of the Disinterested Trustees), and any
amendment to increase materially the costs under the Distribution and Service
Plan with respect to the Fund must be approved by the holders of a majority of
the outstanding shares of the Fund. So long as the Distribution and Service
Plan is in effect, the selection and nomination of the members of the Board of
Trustees who are not "interested persons" (as defined in the 1940 Act) of
Northern Funds will be committed to the discretion of such disinterested
Trustees.
COUNSEL AND AUDITORS
Drinker Biddle & Reath, with offices at Suite 1100, 1345 Chestnut
Street, Philadelphia, Pennsylvania 19107, serve as counsel to Northern Funds.
Arthur Andersen LLP, independent accountants, 33 West Monroe Street,
Chicago, Illinois 60603-5385 serve as auditors for Northern Funds.
IN-KIND PURCHASES
Payment for shares of the Fund may, in the discretion of Northern
Trust, be made in the form of securities that are permissible investments for
the Fund as described in the Prospectus. For further information about this
form of payment, contact the Transfer Agent. In connection with an in-kind
securities payment, the Fund will require, among other things, that the
securities be valued on the day of purchase in accordance with the pricing
methods used by the Fund and that the Fund receive satisfactory assurances that
it will have good and marketable title to the securities received by it; that
the securities be in proper form for transfer to the Fund; and that adequate
information be provided concerning the basis and other tax matters relating to
the securities.
AUTOMATIC INVESTING PLAN
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in shares at predetermined intervals. This
may help investors reduce their average cost per share because the agreed upon
fixed investment amount allows more shares to be purchased during periods of
lower share prices and fewer shares during periods of higher share prices. In
order to be effective, Dollar Cost Averaging should usually be followed on a
sustained, consistent basis. Investors should be aware, however, that shares
bought using Dollar
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Cost Averaging are purchased without regard to their price on the day of
investment or to market trends. Dollar Cost Averaging does not assure a profit
and does not protect against losses in a declining market. In addition, while
investors may find Dollar Cost Averaging to be beneficial, it will not prevent
a loss if an investor ultimately redeems his shares at a price which is lower
than their purchase price. An investor may want to consider his financial
ability to continue purchases through periods of low price levels.
REDEMPTIONS AND EXCHANGES
Exchange requests received on a Business Day prior to the time shares
of the Fund are priced will be processed on the date of receipt. "Processing" a
request means that shares in the fund from which the shareholder is withdrawing
will be redeemed at the net asset value per share next determined on the date
of receipt. Shares of the new fund into which the shareholder is investing will
also normally be purchased at the net asset value per share next determined
coincident to or after the time of redemption. Exchange requests received on a
Business Day after the time shares of the Fund are priced will be processed on
the next Business Day in the manner described above.
Northern Funds reserves the right to make payment for redemptions in
readily marketable securities. If this occurred, a shareholder would bear any
brokerage or other transaction costs incurred in converting the securities so
received to cash. Northern Funds also reserves the right to require a
shareholder to redeem involuntarily shares in the Fund if the balance held of
record by the shareholder drops below $750 and the shareholder does not
increase such balance to $1,000 or more upon 60 days' written notice. Northern
Funds will not require a shareholder to redeem shares of the Fund if the
balance held of record by the shareholder is less than $750 solely because of a
decline in the net asset value of the Fund's shares or because the shareholder
has made an initial investment in a lower amount in accordance with the
Automatic Investment Plan. Northern Funds may also redeem shares involuntarily
if the redemption is appropriate to carry out Northern Funds' responsibilities
under the 1940 Act.
Northern Funds may redeem shares involuntarily to reimburse the Fund
for any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Fund shares as provided in the Fund's Prospectus from time to
time.
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<PAGE> 65
PERFORMANCE INFORMATION
The Fund calculates its "average annual total return" by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:
1
-
ERV n
T = [(-----) - 1]
P
Where: T = average annual total return;
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10
year (or other) periods at the end
of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000;
and
n = period covered by the computation,
expressed in years.
The Fund calculates its "aggregate total return" by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 1]
P
The calculations are made assuming that (a) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, and (b) all recurring fees charged to
all shareholder accounts are included and (c) if after July 31, 1997, the Fund
requires the payment of an additional transaction fee on purchases of Fund
shares, that fee will be taken into account. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption
of the hypothetical investment after deduction of all nonrecurring charges at
the end of the measuring period.
General Information
Any fees imposed by Northern Trust or other Service Organizations on
their customers in connection with investments in the Fund are not reflected in
Northern Funds' calculations of performance for the Fund.
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<PAGE> 66
The Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze the Fund as compared to other funds and other investment
vehicles. However, performance of other funds and other investment vehicles may
not be comparable because of the foregoing variables, and differences in the
methods used in valuing their portfolio instruments, computing net asset value
and determining performance.
From time to time, the Fund's performance may also be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example, the Fund may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating service that
rates mutual funds on the basis of risk-adjusted performance. Rankings that
compare the performance of the Fund to another Northern Fund in appropriate
categories over specific periods of time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including
common stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and
combinations of various capital markets. The performance of these capital
markets is based on the returns of different indices. The Fund may use the
performance of these capital markets in order to demonstrate general
risk-versus-reward investment scenarios. Performance comparisons may also
include the value of a hypothetical investment in any of these capital markets.
The risks associated with the security types in any capital market may or may
not correspond directly to those of the Fund. The Fund may also compare
performance to that of other compilations or indices that may be developed and
made available in the future.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only
of the original investment in the Fund, but also of the additional Fund shares
received through reinvestment.
The Fund may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as
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<PAGE> 67
asset allocation, diversification, risk tolerance, and goal setting,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment
alternatives), investment management techniques, policies or investment
suitability of the Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic account
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic and political conditions, the relationship
between sectors of the economy and the economy as a whole, the effects of
inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as the
views of Northern Trust as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to the Fund. In
addition, selected indices may be used to illustrate historic performance of
selected asset classes. The Fund may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs
or drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, stocks, bonds,
treasury bills and shares of the Fund. In addition, advertisements, sales
literature, communications to shareholders or other materials may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund and/or other mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial management, tax and
retirement planning and investment alternative to certificates of deposit and
other financial instruments. Such sales literature, communications to
shareholders or other materials may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
Materials may include lists of representative clients of Northern
Trust. Materials may refer to the CUSIP numbers of the Fund and may illustrate
how to find the listing of the Fund in newspapers and periodicals. Materials
may also include discussions of other Northern Funds, products, and services.
The Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Fund may compare these measures to
those of another fund. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
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<PAGE> 68
Measures of volatility and correlation may be calculated using averages of
historical data.
The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in the Fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard against
loss in a declining market, the investor's average cost per share can be lower
than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
The Fund may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Fund may include
information regarding the background and experience of its portfolio managers.
TAXES
The following summarizes certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their
own tax situations.
The discussions of federal income tax consequences in the Prospectus
and this Additional Statement are based on the Code and the laws and
regulations issued thereunder as in effect on the date of this Additional
Statement. Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein.
FEDERAL - GENERAL INFORMATION
The Fund intends to qualify as a regulated investment company under
Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, the Fund is
generally exempt from federal income tax on its net investment income and
realized capital gains which it distributes to shareholders, provided that
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it distributes an amount equal to at least the sum of 90% of its tax-exempt
income and 90% of its investment company taxable income (net investment income
and the excess of net short-term capital gain over net long-term capital loss),
if any, for the year (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, the Fund
must derive with respect to a taxable year at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies, or from other income derived with respect to its business of
investing in such stock, securities, or currencies (the "Income Requirement")
and derive less than 30% of its gross income from the sale or other disposition
of securities and certain other investments held for less than three months
(the "Short-Short Test"). Interest (including original issue discount and
accrued market discount) received by the Fund at maturity or on disposition of
a security held for less than three months will not be treated as other income
which is attributable to realized market appreciation, but will be treated as
gross income from the sale or other disposition of securities for this purpose.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of the Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of its total assets
in securities of such issuer and as to which the Fund does not hold more than
10% of the outstanding voting securities of such issuer) and no more than 25%
of the value of the Fund's total assets may be invested in the securities of
any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
The Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain")
for each taxable year. Such gain is distributed as a capital gain dividend and
is taxable to shareholders as long-term capital gain, regardless of the length
of time the shareholder has held the shares, whether such gain was recognized
by the Fund prior to the date on which a shareholder acquired shares of the
Fund and whether the distribution was paid in cash or reinvested in shares. In
addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that have
been paid with respect to such shares.
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In the case of corporate shareholders, distributions of the Fund for
any taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" from domestic corporations
received by the Fund for the year. A dividend usually will be treated as a
"qualifying dividend" if it has been received from a domestic corporation. A
portion of the dividends paid by the Fund may constitute "qualifying
dividends."
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate
of tax for some taxpayers may be higher. An individual's long-term capital
gains are currently taxable at a maximum nominal rate of 28%. For corporations,
long-term capital gains and ordinary income are both taxable at a maximum
nominal rate of 35% (an effective marginal rate of 39% applies in the case of
corporations with taxable incomes between $100,000 and $335,000, and an
effective marginal rate of 38% applies in the case of corporations with taxable
incomes between $15 million and $18,333,333).
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In
such event, all distributions (whether or not derived from exempt-interest
income) would be taxable as ordinary income to the extent of the Fund's current
and accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
Although the Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Fund.
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TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Fund. These rules may have a particular
impact on the amount of income or gain that the Fund must distribute to its
shareholders to comply with the Distribution Requirement, on the income or gain
qualifying under the Income Requirement and on its ability to comply with the
Short-Short Test described above.
Generally, futures contracts and options on futures contracts held by
the Fund (collectively, the "Instruments") at the close of its taxable year are
treated for federal income tax purposes as sold for their fair market value on
the last business day of such year, a process known as "mark-to-market." Forty
percent of any gain or loss resulting from such constructive sales is treated
as short-term capital gain or loss and 60% of such gain or loss is treated as
long-term capital gain or loss without regard to the period the Fund holds the
Instruments ("the 40%-60% rule"). The amount of any capital gain or loss
actually realized by the Fund in a subsequent sale or other disposition of
those Instruments is adjusted to reflect any capital gain or loss taken into
account by the Fund in a prior year as a result of the constructive sale of the
Instruments. Losses with respect to Instruments that are regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Fund are subject to certain loss deferral rules
which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any)
with respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which are also applicable, the holding
period of the securities forming part of the straddle will (if they have not
been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain Instruments, deductions
for interest and carrying charges may not be allowed. Notwithstanding the rules
described above, with respect to Instruments that are part of a "mixed
straddle" and are properly identified as such, the Fund may make an election
which will exempt (in whole or in part) those identified Instruments from the
rules of Section 1256 of the Code including "the 40%-60% rule" and the
mark-to-market on gains and losses being treated for federal income tax
purposes as sold on the last business day of the Fund's taxable year, but gains
and losses will be subject to such short sales, wash sales and loss deferral
rules and the requirement to capitalize interest and carrying charges. Under
Temporary Regulations, the Fund would be allowed (in lieu of the foregoing) to
elect either (a) to offset gains or losses from portions which are part of a
mixed straddle by separately identifying each mixed straddle to which such
treatment applies, or (b) to establish a mixed straddle account for which gains
and losses would be recognized and offset on a periodic basis during the
taxable year. Under either election, "the 40%-60% rule"
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will apply to the net gain or loss attributable to the Instruments, but in the
case of a mixed straddle account election, not more than 50% of any net gain
may be treated as long-term and no more than 40% of any net loss may be treated
as short-term. Options on futures contracts generally receive federal tax
treatment similar to that described above.
With respect to futures contracts and other financial instruments
subject to the mark-to-market rules, the Internal Revenue Service has ruled in
private letter rulings that a gain realized from such a futures contact or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale under
the mark-to-market rules, and will be treated as being derived from a security
held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
mark-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the Short-Short Test is met for a taxable year, increases and decreases
in the value of the Fund's futures contacts and other investments that qualify
as part of a "designated hedge," as defined in the Code, may be netted.
DESCRIPTION OF SHARES
The Trust Agreement permits Northern Funds' Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of one
or more separate series representing interests in different investment
portfolios. Northern Funds may hereafter create series in addition to Northern
Funds' existing series, which represent interests in twenty-four portfolios,
each of which is discussed in this Additional Statement. Under the terms of the
Trust Agreement, each share of the Fund has a par value of $.0001, represents a
proportionate interest in the Fund with each other share of its class and is
entitled to such dividends and distributions out of the income belonging to the
Fund as are declared by the Trustees. Upon any liquidation of the Fund,
shareholders are entitled to share pro rata in the net assets belonging to that
class available for distribution. Shares do not have any preemptive or
conversion rights. The right of redemption is described under "Redeeming and
Exchanging Shares" in the Prospectus. Pursuant to the terms of the 1940 Act,
the right of a shareholder to redeem shares and the date of payment by a Fund
may be suspended for more than seven days (a) for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or trading in the markets the Fund normally utilizes is closed or is
restricted as determined by the SEC, (b) during any emergency, as determined by
the SEC, as a result of which it is not reasonably practicable for the Fund to
dispose of instruments owned by it or fairly to determine the value
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of its net assets, or (c) for such other period as the SEC may by order permit
for the protection of the shareholders of the Fund. Northern Funds may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions. In addition, Northern Funds
reserves the right to adopt, by action of the Trustees, a policy pursuant to
which it may, without shareholder approval, redeem upon not less than 30 days'
notice all of a Fund's shares if such shares have an aggregate value below a
designated amount and if the Trustees determine that it is not practical,
efficient or advisable to continue the operation of the Fund and that any
applicable requirements of the 1940 Act have been met. Shares when issued as
described in the Prospectus are validly issued, fully paid and nonassessable,
except as stated below.
The proceeds received by the Fund for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and
proceeds thereof, subject only to the rights of creditors, will be specifically
allocated to and constitute the underlying assets of the Fund. The underlying
assets of the Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to the Fund and with a share of the
general liabilities of Northern Funds. Expenses with respect to the portfolios
of Northern Funds are normally allocated in proportion to the net asset value
of the respective portfolios except where allocations of direct expenses can
otherwise be fairly made.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as Northern Funds shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each investment portfolio affected by such matter. Rule 18f-2 further
provides that an investment portfolio shall be deemed to be affected by a
matter unless the interests of each investment portfolio in the matter are
substantially identical or the matter does not affect any interest of the
investment portfolio. Under the Rule, the approval of an investment advisory
agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act or any
change in a fundamental investment policy would be effectively acted upon with
respect to an investment portfolio only if approved by a majority of the
outstanding shares of such investment portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of Northern Funds voting together
in the aggregate without regard to a particular investment portfolio.
The term "majority of the outstanding shares" of either the Fund or
another investment portfolio means, with respect to the
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<PAGE> 74
approval of an investment advisory agreement, a distribution plan or a change
in a fundamental investment policy, the vote of the lesser of (i) 67% or more
of the shares of the Fund or portfolio present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund or portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Fund or portfolio.
As of ___________ __, 1997 Northern and its affiliates held of record
substantially all of the outstanding shares of Northern Funds as agent,
custodian, trustee or investment adviser on behalf of their customers. At such
date, The Northern Trust Company, 50 S. LaSalle Street, Chicago, Illinois
60657, and its affiliate banks held as beneficial owner five percent or more of
the outstanding shares of Northern Funds because they possessed sole voting or
investment power with respect to such shares.
As of __________ __, 1997, the name and share ownership of
the entities of individuals which held of record or beneficially more than 5%
of the outstanding shares of the Money Market Fund were as follows:
_________________. As of _________ __, 1997, the name and share ownership of
the entities or individuals which held of record or beneficially more than 5%
of the outstanding shares of the U.S. Government Money Market Fund were as
follows: _______________. As of _________ __, 1997, the name and share
ownership of the entities or individuals which held of record or beneficially
more than 5% of the outstanding shares of the Municipal Money Market Fund were
as follows: ______________. As of _________ __, 1997, the name and share
ownership of the entities or individuals which held of record or beneficially
more than 5% of the outstanding shares of the U.S. Government Select Money
Market Fund were as follows: _________________. As of __________ __, 1997, the
name and share ownership of the entities or individuals which held of record or
beneficially more than 5% of the outstanding shares of the California Municipal
Money Market Fund were as follows: _________________. As of __________ __,
1997, the name and share ownership of the entities or individuals which held of
record or beneficially more than 5% of the outstanding shares of the Select
Equity Fund were as follows: _______________. As of ___________ __, 1997, the
name and share ownership of the entities or individuals which held of record or
beneficially more than 5% of the outstanding shares of the International Select
Equity Fund were as follows: __________________. As of __________ __, 1997, the
name and share ownership of the entities or individuals which held of record or
beneficially more than 5% of the outstanding shares of the Technology Fund were
as follows: __________________. The address of all of the above persons is c/o
The Northern Trust Bank, 50 S. LaSalle Street, Chicago, Illinois 60657.
As a general matter, Northern Funds does not hold annual or
other meetings of shareholders. This is because the Trust
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Agreement provides for shareholder voting only for the election or removal of
one or more Trustees, if a meeting is called for that purpose, and for certain
other designated matters. Each Trustee serves until the next meeting of
shareholders, if any, called for the purpose of considering the election or
reelection of such Trustee or of a successor to such Trustee, and until the
election and qualification of his successor, if any, elected at such meeting,
or until such Trustee sooner dies, resigns, retires or is removed by the
shareholders or two-thirds of the Trustees.
Under Massachusetts law, there is a possibility that shareholders of a
business trust could, under certain circumstances, be held personally liable as
partners for the obligations of the trust. The Trust Agreement contains an
express disclaimer of shareholder (as well as Trustee and officer) liability
for acts or obligations of Northern Funds and requires that notice of such
disclaimer be given in each contract, undertaking or instrument entered into or
executed by Northern Funds or the Trustees. The Trust Agreement provides for
indemnification out of Trust property of any shareholder charged or held
personally liable for the obligations or liabilities of Northern Funds solely
by reason of being or having been a shareholder of Northern Funds and not
because of such shareholder's acts or omissions or for some other reason. The
Trust Agreement also provides that Northern Funds shall, upon proper and timely
request, assume the defense of any charge made against any shareholder as such
for any obligation or liability of Northern Funds and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which Northern Funds
itself would be unable to meet its obligations.
The Trust Agreement provides that each Trustee of Northern Funds will
be liable for his own wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee ("disabling conduct"), and for nothing else, and will not be liable for
errors of judgment or mistakes of fact or law. The Trust Agreement provides
further that Northern Funds will indemnify Trustees and officers of Northern
Funds against liabilities and expenses incurred in connection with litigation
and other proceedings in which they may be involved (or with which they may be
threatened) by reason of their positions with Northern Funds, except that no
Trustee or officer will be indemnified against any liability to Northern Funds
or its shareholders to which he would otherwise be subject by reason of
disabling conduct.
The Trust Agreement provides that each shareholder, by virtue of
becoming such, will be held to have expressly assented and agreed to the terms
of the Trust Agreement and to have become a party thereto.
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OTHER INFORMATION
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement
as to the contents of any contract or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuers or related supporting institutions have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earning coverage
of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
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"Prime-2" - Issuers or related supporting institutions have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuers or related supporting institutions have
an acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just
below risk-free U.S. Treasuryshort-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
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"D-4" - Debt possesses speculative investment
characteristics. Liquidity is not sufficient to ensure against disruption in
debt service. Operating factors and market access may be subject to a high
degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued by
a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
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dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is
regarded as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with
an original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit
feature are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity
for timely repayment.
"A2" - Obligations are supported by a good capacity for
timely repayment.
"A3" - Obligations are supported by a satisfactory
capacity for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default
or which are currently in default.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard &
Poor's for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to
pay interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
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"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated
to senior debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative,
hybrid, and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such
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changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
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Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred dividends.
Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA"
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categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "BBB" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with
an original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead
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to increased investment risk than for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned
one of these ratings where it is considered that speculative characteristics
are present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's
lowest investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
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"D" - This designation indicates that the long-term debt
is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection
may be narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection
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commonly regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, the Fund may enter into certain
futures transactions. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
Description of Interest Rate Futures Contracts. Bond prices
are established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained fairly
predictable relationships.
An interest rate futures contract sale would create an
obligation by the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. A futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of the specific type of financial instrument at a
specific future time at a specific price. The specific securities delivered or
taken, respectively, at settlement date, would not be determined until at or
near that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery of securities. Closing out a futures contract sale is effected by the
Fund entering into a futures contract purchase for the same aggregate amount of
the specific type of financial instrument and the same delivery date. If the
price of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges -- principally, the Chicago
Board of Trade, the Chicago Mercantile Exchange and the New York Futures
Exchange. Each exchange guarantees performance under
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contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering
various financial instruments including long-term U.S. Treasury Bonds and
Notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage backed securities; three-month U.S. Treasury Bills; and ninety-day
commercial paper. The Fund may trade in any interest rate futures contracts for
which there exists a public market, including, without limitation, the
foregoing instruments.
II. Index Futures Contracts
General. A stock or bond index assigns relative values to the
stocks or bonds included in the index, which fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market indexes, such as Standard
& Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by
the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
III. Margin Payments
Unlike purchase or sales of portfolio securities, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when the Fund has
purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Fund will be entitled
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to receive from the broker a variation margin payment equal to that increase in
value. Conversely, where the Fund has purchased a futures contract and the
price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Fund would
be required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, Northern Trust may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures
by the Fund. One risk arises because the price of futures may not correlate
perfectly with movement in the cash market due to certain market distortions.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. Second, with respect
to financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect correlation
between the movements in the cash market and movements in the price of futures,
a correct forecast of general market trends or interest rate movements by the
adviser may still not result in a successful hedging transaction over a short
time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an
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increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities will in fact correlate with the
price movements in the futures contract and thus provide an offset on a futures
contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered into
at a price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation
margin payments.
Successful use of futures by the Fund is also subject to
Northern Trust's ability to predict correctly movements in the direction of the
market. If the value of a futures position declines and the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so.
V. Options on Futures Contracts
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss. The Fund will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin
deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also
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entails the risk that changes in the value of the underlying futures contract
will not correspond to changes in the value of the option purchased. Depending
on the pricing of the option compared to either the futures contract upon which
it is based, or upon the price of the securities held by the Fund, an option
may or may not be less risky than ownership of the futures contract or such
securities. In general, the market prices of options can be expected to be more
volatile than the market prices on the underlying futures contract. Compared to
the purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures
contracts.
VII. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
<TABLE>
<S> <C> <C>
(a) Financial Statements: None.
(b) Exhibits:
The following exhibits are incorporated herein by reference:
1(a) - Agreement and Declaration of Trust dated October 12, 1993
filed as Exhibit 1(a) to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, filed on
July 29, 1996 ("PEA No. 11").
1(b) - Amendment No. 1 to Agreement and Declaration of Trust filed
as Exhibit 1(b) to PEA No. 11.
1(c) - Amendment No. 2 to Agreement and Declaration of Trust filed
as Exhibit 1(c) to PEA No. 11.
1(d) - Amendment No. 3 to Agreement and Declaration of Trust filed
as Exhibit 1(d) to PEA No. 11.
1(e) - Amendment No. 4 to Agreement and Declaration of Trust filed
as Exhibit 1(e) to PEA No. 11.
1(f) - Amendment No. 5 to Agreement and Declaration of Trust
dated May 26, 1995 filed as Exhibit 1(f) to Post-Effective
Amendment No. 9 to Registrant's Registration Statement on
Form N-1A, filed on June 12, 1996 ("PEA No. 9").
1(g) - Amendment No. 6 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(g) to Post-Effective
Amendment No. 12 to Registrant's Registration Statement on
Form N-1A, filed on October 30, 1996 ("PEA No. 12").
1(h) - Amendment No. 7 to Agreement and Declaration of Trust dated
August 6, 1996 filed as Exhibit 1(h) to PEA No. 12.
2 - By-Laws filed as Exhibit 2 to PEA No. 11.
2(a) - Amendment to the By-Laws dated August 4, 1994 filed as
Exhibit 2(a) to PEA No. 11.
3 - Not Applicable.
4 - Not Applicable.
5 - Investment Advisory and Ancillary Services Agreement between
Registrant and The Northern Trust Bank dated April 1, 1994
("Investment Advisory Agreement") filed as Exhibit 5 to PEA
No. 11.
5(a) - Addendum No. 1 to the Investment Advisory Agreement dated
November 29, 1994 filed as Exhibit 5(a) to PEA No. 11.
</TABLE>
<PAGE> 95
<TABLE>
<S> <C> <C>
5(b) - Addendum No. 2 to the Investment Advisory Agreement dated
March 29, 1996 filed as Exhibit 5(b) to PEA No. 9.
5(c) - Addendum No. 3 to the Investment Advisory Agreement dated
August 7, 1996 filed as Exhibit 5(c) to PEA No. 12.
5(d) - Form of Addendum No. 4 to the Investment Advisory Agreement
filed as Exhibit 5(d) to PEA No. 13.
6 - Distribution Agreement between Registrant and Sunstone
Financial Group, Inc. dated April 1, 1994 ("Distribution
Agreement") filed as Exhibit 6 to PEA No. 11.
6(a) - Amended and Restated Schedule A to the Distribution
Agreement dated November 28, 1994 filed as Exhibit 6(a) to
PEA No. 11.
6(b) - Amended and Restated Schedule A to the Distribution
Agreement dated March 29, 1996 filed as Exhibit 6(b) to PEA
No. 9.
6(c) - Amended and Restated Schedule A to the Distribution
Agreement dated August 7, 1996 filed as Exhibit 6(c) to PEA
No. 12.
6(d) - Distribution Agreement between Registrant and Sunstone
Distribution Services, LLC dated January 1, 1997
("Distribution Agreement") filed as Exhibit 6(e) to Post-
Effective Amendment No. 14 to Registrant's Registration
Statement on Form N-1A, filed on January 27, 1997 ("PEA No.
14").
6(e) - Form of Amended and Restated Schedule A to Distribution
Agreement between Registrant and Sunstone Distribution
Services, LLC filed as Exhibit 6(f) to PEA No. 14.
7 - Not Applicable.
8(a) - Custodian Agreement between Registrant and The Northern
Trust Bank dated April 1, 1994 ("Custodian Agreement") filed
as Exhibit 8(a) to PEA No. 11.
8(b) - Transfer Agency Agreement between Registrant and The
Northern Trust Bank dated April 1, 1994 ("Transfer Agency
Agreement") filed as Exhibit 8(b) to PEA No. 11.
8(c) - Addendum No. 1 to the Transfer Agency Agreement dated
November 29, 1994 filed as Exhibit 8(c) to PEA No. 11.
8(d) - Addendum No. 1 to the Custodian Agreement dated November 29,
1994 filed as Exhibit 8(d) to PEA No. 11.
8(e) - Addendum No. 2 to the Transfer Agency Agreement dated
March 29, 1996 filed as Exhibit 8(e) to PEA No. 9.
8(f) - Addendum No. 2 to the Custodian Agreement dated March 29,
1996 filed as Exhibit 8(f) to PEA No. 9.
</TABLE>
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<TABLE>
<S> <C> <C>
8(g) - Foreign Custody Agreement between the Registrant and The
Northern Trust Bank dated April 1, 1994 filed as Exhibit
8(g) to PEA No. 11.
8(h) - Addendum No. 3 to the Transfer Agency Agreement dated August
7, 1996 filed as Exhibit 8(h) to PEA No. 12.
8(i) - Addendum No. 3 to the Custodian Agreement dated August 7,
1996 filed as Exhibit 8(i) to PEA No. 12.
8(j) - Addendum No. 4 to the Custodian Agreement dated August 7,
1996 filed as Exhibit 8(j) to PEA No. 12.
8(k) - Form of Addendum No. 4 to the Transfer Agency Agreement
filed as Exhibit 8(k) to PEA No. 13.
8(l) - Form of Addendum No. 5 to the Custodian Agreement filed as
Exhibit 8(l) to PEA No. 13.
9(a) - Administration Agreement between Registrant and Sunstone
Financial Group, Inc. dated April 1, 1994 ("Administration
Agreement") filed as Exhibit 9(a) to PEA No. 11.
9(b) - Service Plan and Related Agreement filed as Exhibit 9(b) to
PEA No. 9.
9(c) - Amended and Restated Schedule A to the Administration
Agreement dated November 28, 1994 filed as Exhibit 9(c) to
PEA No. 11.
9(d) - Amended and Restated Schedule A to the Administration
Agreement dated March 29, 1996 filed as Exhibit 9(d) to PEA
No. 9.
9(e) - Amended and Restated Schedule A to the Administration
Agreement dated August 7, 1996 filed as Exhibit 9(e) to PEA
No. 12.
9(f) - Form of Amended and Restated Schedule A to the
Administration Agreement filed as Exhibit 9(f) to PEA No.
13.
* 10 - Opinion and Consent of Counsel.
12 - Not Applicable.
13(a) Purchase Agreement between Registrant and The
Northern Trust Bank dated March 31, 1994 filed as
Exhibit 13(a) to PEA No 11.
13(b) - Purchase Agreement between Registrant and Miriam M. Allison
dated March 14, 1994 filed as Exhibit 13(b) to PEA No. 11.
14 - Not Applicable.
15 - Distribution and Service Plan and Related Agreement filed as
Exhibit 15 to PEA No. 9.
</TABLE>
- --------
* Filed under Rule 24f-2 as part of Registrant's Rule 24f-2 Notice.
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<TABLE>
<S> <C> <C>
16 - Schedule of Computation of Performance Quotations for the
Money Market, U.S. Government Money Market, Municipal Money
Market, U.S. Government, Fixed Income, Intermediate Tax-
Exempt, Tax-Exempt, International Fixed Income, Income
Equity, Growth Equity, Select Equity, Small Cap Growth,
International Growth Equity and International Select Equity
Funds filed as Exhibit 16 to PEA No. 11.
16(a) - Schedule of Computation of Performance Quotations for the
California Municipal Money Market and U.S. Government Select
Money Market Funds filed as Exhibit 16(a) to PEA No. 11.
16(b) - Schedule for Computation of Performance Quotations for the
Technology Fund filed as Exhibit 16(b) to PEA No. 12.
16(c) - Schedule for Computation of Performance Quotations for the
Florida Intermediate Tax-Exempt and Stock Index Funds filed
as Exhibit 16(c) to PEA No. 14.
18 - Not Applicable.
The following exhibits are filed herewith:
1 (i) - Amendment No. 8 to Agreement and Declaration of Trust.
1 (j) - Form of Amendment No. 9 to Agreement and Declaration of
Trust.
5 (e) - Form of Addendum No. 5 to the Investment Advisory Agreement.
6 (f) - Form of Amended and Restated Schedule A to the Distribution
Agreement.
8 (m) - Form of Addendum No. 5 to the Transfer Agency Agreement.
8 (n) - Form of Addendum No. 6 to the Custodian Agreement.
9 (g) - Form of Amended and Restated Schedule A to the
Administration Agreement.
11(a) - Consent of Drinker Biddle & Reath.
</TABLE>
Item 25. Persons Controlled by or Under Common Control with Registrant
Registrant is controlled by its Board of Trustees.
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Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record
Holders as of
Title of Class December 31, 1996
--------------- -----------------
<S> <C>
Money Market Fund.................................... 6,556
U.S. Government Money Market Fund.................... 963
Municipal Money Market Fund.......................... 3,320
U.S. Government Select Money Market Fund............. 659
California Municipal Money Market Fund............... 739
U.S. Government Fund................................. 1,740
Fixed Income Fund.................................... 1,715
Intermediate Tax-Exempt Fund......................... 1,607
Florida Intermediate Tax-Exempt Fund................. 105
Tax-Exempt Fund...................................... 1,066
International Fixed Income Fund...................... 880
Income Equity Fund................................... 1,608
Stock Index Fund..................................... 116
Growth Equity Fund................................... 3,812
Select Equity Fund................................... 1,872
Small Cap Fund....................................... 4,256
International Growth Equity Fund..................... 3,912
International Select Equity Fund..................... 2,315
Technology Fund...................................... 1,236
</TABLE>
Item 27. Indemnification
Section 7 of the Investment Advisory and Ancillary Services
Agreement between the Registrant and The Northern Trust Bank ("Northern")
provides for indemnification of Northern or, in lieu thereof, contribution by
Registrant, in connection with certain claims and liabilities to which
Northern, in its capacity as Registrant's Adviser, may be subject. A copy of
the Investment Advisory and Ancillary Services Agreement is incorporated by
reference herein as Exhibit 5.
Section 5 of the Administration Agreement between the
Registrant and Sunstone Financial Group, Inc. ("Sunstone") provides for
indemnification of Sunstone in connection with certain claims and liabilities
to which Sunstone, in its capacity as Registrant's Administrator, may be
subject. A copy of the Administration Agreement is incorporated by reference
herein as Exhibit 9(a).
Section 2.8 of the Distribution Agreement between the
Registrant and Sunstone Distribution Services, LLC provides for indemnification
of Sunstone Distribution Services, LLC, an affiliate of Sunstone, in connection
with certain claims and liabilities to which Sunstone Distribution Services,
LLC, in its capacity as Registrant's Distributor, may be subject. A copy of the
Distribution Agreement is incorporated by reference herein as Exhibit 6(d).
In addition, Section 6.3 of Registrant's Agreement and
Declaration of Trust, a copy of which is incorporated by reference herein as
Exhibit 1, provides for indemnification of shareholders as follows:
6.3 Indemnification of Shareholders. No Shareholder shall be
subject to any personal liability whatsoever to any person in
connection with property of the Trust or the acts,
obligations or affairs of the Trust or
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any Series thereof. The Trust shall indemnify and
hold each Shareholder harmless from and against all claims
and liabilities, to which such Shareholder may become subject
by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder or former Shareholder (or
his or her heirs, executors, administrators or other legal
representatives or in the case of a corporation or other
entity, its corporate or other general successor) out of the
property of the Trust for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of assets of
the one or more Series whose Shares were held by said
Shareholder at the time the act or event occurred which gave
rise to the claim against or liability of said Shareholder.
The rights accruing to a Shareholder under this Section shall
not impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust or any Series thereof to
indemnify or reimburse a Shareholder in any appropriate
situation even though not specifically provided herein.
Section 6.4 of Registrant's Agreement and Declaration of
Trust, a copy of which is incorporated by reference herein as Exhibit 1,
provides for indemnification of Trustees and officers, as follows:
6.4 Indemnification of Trustees, Officers, etc. The Trust
shall indemnify each of its Trustees and officers and persons
who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any
interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person") against all liabilities,
including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and
expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense
or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative
or legislative body, in which such Covered Person may be or
may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in
office or thereafter, by reason of being or having been such
a Trustee or officer, director or trustee, except that no
Covered Person shall be indemnified against any liability to
the Trust or its Shareholders to which such Covered Person
would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's
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office (such wilful misfeasance, bad faith, gross
negligence or reckless disregard being referred to herein as
"Disabling Conduct"). Expenses, including accountants' and
counsel fees so incurred by any such Covered Person (but
excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), may be paid from time
to time by the Trust in advance of the final disposition of
any such action, suit or proceeding upon receipt of (a) an
undertaking by or on behalf of such Covered Person to repay
amounts so paid to the Trust if it is ultimately determined
that indemnification of such expenses is not authorized under
this Article VI and either (b) such Covered Person provides
security for such undertaking, (c) the Trust is insured
against losses arising by reason of such payment, or (d) a
majority of a quorum of disinterested, non-party Trustees, or
independent legal counsel in a written opinion, determines,
based on a review of readily available facts, that there is
reason to believe that such Covered Person ultimately will be
found entitled to indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to Trustees, officers and controlling
persons of Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a Trustee, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
The Northern Trust Bank, Registrant's investment adviser, is
a full service commercial bank and also provides a full range of trust and
fiduciary services. Set forth below is a list of all of the directors, senior
officers and those officers primarily responsible for Registrant's affairs of
The Northern Trust Bank and, with respect to each such person, the name and
business address of the company (if any) with which such person has been
connected at any time since April 1, 1995, as well as the capacity in which
such person was connected.
-7-
<PAGE> 101
<TABLE>
<CAPTION>
Name and Principal
Name and Position Business Address Connection with
with Investment Adviser of Other Company Other Company
- ----------------------- ---------------- -------------
<S> <C> <C>
Dolores E. Cross Northern Trust Corporation Director
Director
Chicago State University President
95th Street at King Drive
Chicago, IL 60643
John R. Goodwin None
Vice President
Robert S. Hamada The University of Chicago Edward Eagle Brown
Director Graduate School of Business Distinguished Service
1101 East 58th Street Professor of Finance
Chicago, IL 60637 and Dean
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
A.M. Castle & Co. Director
3400 North Wolf Road
Franklin Park, IL 60131
Name and Principal
Chicago Board of Trade Director
141 West Jackson Boulevard
Chicago, IL 60604
Barry G. Hastings Northern Trust Corporation President and Chief
President, Chief 50 South LaSalle Street Operating Officer
Operating Officer Chicago, IL 60675 and Director
and Director and Former
Vice Chairman and Senior
Executive Vice
President
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Northern Trust of California Director
Corporation
355 South Grand Avenue
Los Angeles, CA 90017
Northern Trust of Florida Chairman of the
Corporation Board and Director
700 Brickell Avenue
Miami, FL 33131
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Robert A. Helman Mayer, Brown & Platt Partner
Director 190 South LaSalle Street
Chicago, IL 60603
Northern Trust Corporation Director
50 South LaSalle Street
</TABLE>
-8-
<PAGE> 102
<TABLE>
<CAPTION>
Name and Principal
Name and Position Business Address Connection with
with Investment Adviser of Other Company Other Company
- ----------------------- ---------------- -------------
<S> <C> <C>
Chicago, IL 60675
The Horsham Corporation Director
24 Hazelton Avenue
Toronto, Ontario, Canada
M5R 2E2
Brambles USA, Inc. Director
400 North Michigan Avenue
Chicago, IL 60611
Chicago Stock Exchange Governor
One Financial Plaza
440 South LaSalle Street
Chicago, IL 60605
Alberta Natural Gas Director
Company Ltd.
2900, 240 Fourth Avenue, NW
Calgary, Alberta, Canada
T2P4L7
Arthur L. Kelly KEL Enterprises L.P. Managing Partner
Director Name and Principal
135 South LaSalle Street
Chicago, IL 60603
Bayerische Motoren Werke (BMW) A.G. Director
BMW Haus
Petuelring 130
Postfach 40 02 40
D-8000
Munich 40 Germany
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Snap-on Incorporated Director
2801 80th Street
Kenosha, WI 53140
Tejas Gas Corporation Director
1301 McKinney Street
Houston, TX 77010
Deere & Company Director
John Deere Road
Moline, IL 61265
Robert D. Krebs Santa Fe Pacific Corporation Former Chairman,
Director 1700 East Golf Road President and
Schaumburg, IL 60173-5860 Chief Executive
Officer and Director
</TABLE>
-9-
<PAGE> 103
<TABLE>
<CAPTION>
Name and Principal
Name and Position Business Address Connection with
with Investment Adviser of Other Company Other Company
- ----------------------- ---------------- -------------
<S> <C> <C>
Burlington Northern President and Chief
Santa Fe Corporation Executive Officer
P.O. Box 961052 and Director
Fort Worth, TX 76161-0052
Burlington Northern Inc. Director
777 Main Street
Fort Worth, TX 76102
Burlington Northern Director
Railroad Company
777 Main Street
Fort Worth, TX 76102
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Santa Fe Pacific Gold Director
Corporation
6200 Uptown Boulevard
Albuquerque, NM 87110
Santa Fe Pacific Gold Director
Corporation
Name and Principal
P.O. Box 27019
Albuquerque, NM 87125
Phelps Dodge Corporation Director
2600 North Central Avenue
Phoenix, AZ 85004-3014
Santa Fe Energy Resources Inc. Director
1616 South Voss Road
Houston, TX 77057
Santa Fe Pacific Pipelines, Inc. Director
888 South Figueroa Street
Los Angeles, CA 90017
Frederick A. Krehbiel Molex Incorporated Chairman, Chief
Director 2222 Wellington Court Executive Officer
Lisle, IL 60532-1682 and Former Vice
Chairman
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Nalco Chemical Company Director
One Nalco Center
Naperville, IL 60563-1198
Tellabs, Inc. Director
4951 Indiana Avenue
Lisle, IL 60532
</TABLE>
-10-
<PAGE> 104
<TABLE>
<CAPTION>
Name and Principal
Name and Position Business Address Connection with
with Investment Adviser of Other Company Other Company
- ----------------------- ---------------- -------------
<S> <C> <C>
Roger W. Kushla The Northern Trust Company Director
Senior Vice President of New York
80 Broad Street
19th Floor
New York, NY 10004
Robert A. LaFleur None
Senior Vice President
Thomas L. Mallman None
Senior Vice President
James J. Mitchell, III The Northern Trust Company Director
Executive Vice President of New York
80 Broad Street
19th Floor
New York, NY 10004
William G. Mitchell Northern Trust Corporation Director
Director 50 South LaSalle Street
Chicago, IL 60675
The Interlake Corporation Director
7701 Harger Road
Oak Brook, IL 60521-1488
Peoples Energy Corporation Director
122 South Michigan Avenue
Chicago, IL 60603
The Sherwin-Williams Company Director
101 Prospect Avenue, N.W.
Cleveland, OH 44115-1075
Edward J. Mooney Nalco Chemical Company Chairman, Chief
Director One Nalco Center Executive Officer,
Naperville, IL 60563-1198 President and
Director
Morton International, Inc. Director
100 North Riverside Plaza
Chicago, IL 60606
William A. Osborn Northern Trust Corporation Director
Chairman and Chief 50 South LaSalle Street
Executive Officer, Chicago, IL 60675
Former President
and Chief
Operating Officer, Nortrust Realty Management, Inc. Director
Former Senior Executive 50 South LaSalle Street
Vice President Chicago, IL 60675
Northern Trust of Director and Former
California Corporation Chairman of the Board
355 South Grand Avenue
Los Angeles, CA 90017
Northern Futures Corporation Director
50 South LaSalle Street
Chicago, IL 60675
</TABLE>
-11-
<PAGE> 105
<TABLE>
<CAPTION>
Name and Principal
Name and Position Business Address Connection with
with Investment Adviser of Other Company Other Company
- ----------------------- ---------------- -------------
<S> <C> <C>
Sheila A. Penrose RCB International Inc Director
Executive Vice President 29 Federal Street
Stamford, CT 06901
Perry R. Pero Northern Futures Corporation Director
Senior Executive Vice 50 South LaSalle Street
President, Chief Financial Chicago, IL 60675
Officer and Cashier
Northern Investment Corporation President and,
50 South LaSalle Street Director and
Chicago IL 60675 Former Chairman
and Treasurer
RCB International Inc. Director
29 Federal Street
Stamford, CT 06901
Northern Trust Securities, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Nortrust Realty Management, Inc. Director
50 South LaSalle Street
Chicago, IL 60675
Peter L. Rossiter Schiff, Hardin & Waite Former Partner
Executive Vice President, 7200 Sears Tower
General Counsel and Chicago, IL 60606
Secretary
Tanglewood Bancshares Inc. Former Vice President
600 Bering Drive and Director
Houston, TX 77057
Consolidated Communications, Inc. Director
Illinois Consolidated Telephone
Company
121 South 17th Street
Mattoon, IL 61938
Northern Trust Corporation Executive Vice
50 South LaSalle Street President, Secretary,
Chicago, IL 60675 and General Counsel
Harold B. Smith Illinois Tool Works Inc. Chairman of the
Director 3600 West Lake Avenue Executive Committee
Glenview, IL 60025-5811 and a Director
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
W. W. Grainger, Inc. Director
5500 West Howard Street
Skokie, IL 60077
</TABLE>
-12-
<PAGE> 106
<TABLE>
<CAPTION>
Name and Principal
Name and Position Business Address Connection with
with Investment Adviser of Other Company Other Company
- ----------------------- ---------------- -------------
<S> <C> <C>
Northwestern Mutual Life Trustee
Insurance Co.
720 East Wisconsin Avenue
Milwaukee, WI 53202
William D. Smithburg The Quaker Oats Company Chairman, President
Director 321 North Clark Street and Chief Executive
Chicago, IL 60610 Officer and Director
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
Abbott Laboratories Director
One Abbott Park Road
Abbott Park, IL 60064-3500
Corning Incorporated Director
Corning, NY 14831
Prime Capital Corporation Director
P.O. Box 8460
Rolling Meadows, IL 60008
James M. Snyder None
Senior Vice President
Bide L. Thomas Commonwealth Edison Company Former President and a
Director One First National Plaza Former Director
Chicago, IL 60603
Northern Trust Corporation Director
50 South LaSalle Street
Chicago, IL 60675
R. R. Donnelley & Sons Company Director
77 West Wacker Drive
Chicago, IL 60601
MYR Group Inc. Director
*(formerly L.E. Myers Company)
2550 West Golf Road
Rolling Meadows, IL 60008
* Name change
</TABLE>
Item 29. Principal Underwriter
(a) Sunstone Distribution Services, LLC currently serves as
distributor of the shares of The Haven Capital Management Trust, First Omaha
Funds, Inc and The Purisima Funds.
(b) To the best of Registrant's knowledge, the directors and
executive officers of Sunstone Distribution Services, LLC, distributor for
Registrant, are as follows:
-13-
<PAGE> 107
<TABLE>
<CAPTION>
Positions and
Offices with Positions and
Name and Principal Sunstone Distribution Offices with
Business Address Services, LLC Registrant
- ---------------- ------------- ----------
<S> <C> <C>
Miriam M. Allison President and Member Vice President
207 E. Buffalo Street and Treasurer
Suite 400
Milwaukee, WI 53202
Daniel S. Allison Secretary None
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
Mary M. Tenwinkel Vice President Vice President
207 E. Buffalo Street
Suite 400
Milwaukee, WI 53202
(c) None.
</TABLE>
Item 30. Location of Accounts and Records
The Agreement and Declaration of Trust, By-laws and minute
books of the Registrant are in the physical possession of Drinker Biddle &
Reath, 1100 Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107. Records relating to Sunstone Financial Group,
Inc.'s functions as distributor and administrator for the Registrant are
located at 207 E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. All
other accounts, books and other documents required to be maintained under
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are in the physical possession of The Northern Trust Bank, 50 S.
LaSalle Street, Chicago, Illinois 60675 or 801 S. Canal Street, Chicago,
Illinois 60607 (relating to transfer agent).
Item 31. Management Services
(a) Not Applicable.
Item 32. Undertakings
(a) (i) Registrant hereby undertakes to file a
Post-Effective Amendment, using financial statements which need not be
certified, within four to six months from the effective date of Registrant's
Post-Effective Amendment No. 14 for the Short-Intermediate U.S. Government
Fund, California Intermediate Tax-Exempt Fund, Arizona Tax-Exempt Fund and
California Tax-Exempt Fund.
(ii) Registrant hereby undertakes to file a
Post-Effective Amendment, using financial statements which need not be
certified, within four to six months from the effective date of Registrant's
Post-Effective Amendment No. 15 for the Small Company Index Fund.
(b) Registrant undertakes to provide its Annual
Report to Shareholders upon request without charge to any recipient of a
Prospectus for the U.S. Government Fund, Short-Intermediate U.S. Government
Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Florida Intermediate
Tax-Exempt
-14-
<PAGE> 108
Fund, California Intermediate Tax-Exempt Fund, Tax-Exempt Fund, Arizona Tax-
Exempt Fund, California Tax-Exempt Fund, International Fixed Income Fund,
Income Equity Fund, Stock Index Fund, Growth Equity Fund, Select Equity Fund,
Small Cap Fund, International Growth Equity Fund, International Select Equity
Fund, Technology Fund and Small Company Index Fund.
-15-
PHTRANS:150907_1.WP5
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant has duly caused this
Post- Effective Amendment No. 15 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milwaukee and State of Wisconsin on the 25th day of February, 1997.
NORTHERN FUNDS
By: /s/Miriam M. Allison
--------------------------------
Miriam M. Allison
Treasurer
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 15 to Registrants' Registration Statement has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/*/ Silas S. Cathcart* Trustee and February 25, 1997
- ------------------------------------- President (Chief ------------------
Silas S. Cathcart Executive Officer)
/s/Miriam Treasurer February 25, 1997
- ------------------------------------- (Chief Financial ------------------
Miriam M. Allison and Accounting
Officer)
/*/ James W. Cozad* Trustee February 25, 1997
- ------------------------------------- ------------------
James W. Cozad
/*/ Susan Crown* Trustee February 25 , 1997
- ------------------------------------- ------------------
Susan Crown
/*/ Wesley M. Dixon, Jr.* Trustee February 25, 1997
- ------------------------------------- ------------------
Wesley M. Dixon, Jr.
/*/ William J. Dolan, Jr.* Trustee February 25, 1997
- ------------------------------------- ------------------
William J. Dolan, Jr.
/*/ Raymond E. George, Jr.* Trustee February 25, 1997
- ------------------------------------- ------------------
Raymond E. George, Jr.
</TABLE>
-16-
<PAGE> 110
<TABLE>
<S> <C>
*By: /s/Miriam M. Allison February 25, 1997
- ------------------------------------- ------------------
Miriam M. Allison,
Attorney-in-fact
</TABLE>
-17-
<PAGE> 111
NORTHERN FUNDS
(A Massachusetts Business Trust)
CERTIFICATE OF SECRETARY
The foregoing resolution was duly adopted by the Board of
Trustees of Northern Funds at a Meeting of the Board of Trustees held on
February 12, 1997, and remains in effect on the date hereof:
RESOLVED, that the trustees and officers of Northern Funds
who may be required to execute any amendment to the Registration
Statement of Northern Funds be, and each of them hereby is, authorized
to execute a Power of Attorney appointing Jeffrey A. Dalke and Miriam
M. Allison, either of them, their true and lawful attorney or
attorneys, to execute in their name, place and stead, in their
capacity as trustee or officer, or both, of the Northern Funds, any
and all amendments to said Registration Statement, and all instruments
necessary or incidental in connection therewith, and to file the same
with the Securities and Exchange Commission; and either of said
attorneys shall have full power and authority to do in the name and on
behalf of said trustees and officers, or any or all of them, in any
and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as each
of said trustees or officers, or any or all of them, might or could do
in person, said acts of said attorneys, or either of them, being
hereby ratified and approved.
IN WITNESS WHEREOF, I have hereunto set my hand this 21st day
of February, 1997.
NORTHERN FUNDS
/s/Jeffrey A. Dalke
-------------------------------
Jeffrey A. Dalke
Secretary
<PAGE> 112
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Miriam
M. Allison, hereby constitutes and appoints Jeffrey A. Dalke her true and
lawful attorney, to execute in her name, place, and stead, in her capacity as
officer of the Trust, the Registration Statement and any amendments thereto and
all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and said attorney shall
have full power of substitution and resubstitution; and said attorney shall
have full power and authority to do and perform in her name and on her behalf,
in any and all capacities, every act whatsoever requisite or necessary to be
done, as fully and to all intents and purposes as she might or could do in
person, said acts of said attorney being hereby ratified and approved.
DATED: March 7, 1994
/s/ Miriam M. Allison
- --------------------------
Miriam M. Allison
<PAGE> 113
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Silas
S. Cathcart, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: October 13, 1993
/s/ Silas S. Cathcart
- -----------------------------
Silas S. Cathcart
<PAGE> 114
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, James
W. Cozad, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: October 13, 1993
/s/ James W. Cozad
- -------------------------------
James W. Cozad
<PAGE> 115
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Susan
Crown, hereby constitutes and appoints Jeffrey A. Dalke and Miriam M. Allison
and either of them, her true and lawful attorney, to execute in her name,
place, and stead, in her capacity as Trustee or officer, or both, of the Trust,
the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and each of said attorneys shall have full
power of substitution and resubstitution; and each of said attorneys shall have
full power and authority to do and perform in her name and on her behalf, in
any and all capacities, every act whatsoever requisite or necessary to be done,
as fully and to all intents and purposes as she might or could do in person,
said acts of each of the said attorneys being hereby ratified and approved.
DATED: October 13, 1993
/s/ Susan Crown
- ----------------------
Susan Crown
<PAGE> 116
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Wesley
M. Dixon, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: February 24, 1994
/s/ Wesley M. Dixon, Jr.
- ----------------------------
Wesley M. Dixon, Jr.
<PAGE> 117
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, William
J. Dolan, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: February 28, 1994
/s/ William J. Dolan, Jr.
- ---------------------------------
William J. Dolan, Jr.
<PAGE> 118
NORTHERN FUNDS
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned, Raymond
E. George, Jr., hereby constitutes and appoints Jeffrey A. Dalke and Miriam M.
Allison and either of them, his true and lawful attorney, to execute in his
name, place, and stead, in his capacity as Trustee or officer, or both, of the
Trust, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and each of said attorneys
shall have full power of substitution and resubstitution; and each of said
attorneys shall have full power and authority to do and perform in his name and
on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, said acts of each of the said attorneys being hereby
ratified and approved.
DATED: February 23, 1994
/s/ Raymond E. George, Jr.
- ----------------------------
Raymond E. George, Jr.
<PAGE> 119
NORTHERN FUNDS
EXHIBIT INDEX
Exhibits
<TABLE>
<S> <C> <C>
1(i) - Amendment No. 8 to Agreement and Declaration
of Trust.
1(j) - Form of Amendment No. 9 to Agreement and
Declaration of Trust.
5(e) - Form of Addendum No. 5 to the Investment
Advisory Agreement.
6(f) - Form of Amended and Restated Schedule A to
the Distribution Agreement.
8(m) Form of Addendum No. 5 to Transfer Agency
Agreement.
8(n) - Form of Addendum No. 6 to Custodian
Agreement.
9(g) - Form of Amended and Restated Schedule A to
the Administration Agreement.
11(a) - Consent of Drinker Biddle & Reath.
</TABLE>
<PAGE> 1
EXHIBIT 1(I)
NORTHERN FUNDS
AMENDMENT NO. 8 TO AGREEMENT AND DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration of
Trust dated October 12, 1993 (the "Declaration") of Northern Funds (the
"Trust") provides that the Declaration may be amended to establish and
designate new Series or Classes of Shares by an instrument in writing executed
by a majority of the Trustees of the Trust and setting forth such establishment
and designation and the relative rights and preferences of such Series or
Classes;
NOW THEREFORE, the undersigned, being a majority of the
Trustees of the Trust, hereby:
(1) amend the Declaration by designating and establishing
four additional Series and Classes of Shares ("Additional Series and
Classes") to be known as the Initial Classes of the "Arizona
Tax-Exempt Fund," "California Intermediate Tax-Exempt Fund,"
"California Tax-Exempt Fund," and "Short-Intermediate U.S. Government
Fund," such Additional Series and Classes to have the relative rights
and preferences set forth in Section 4.2(a) through (m) of the
Declaration; and
(2) determine that pursuant to Section 7.3 of the
Declaration the foregoing amendment shall be effective as of
the date set forth below.
WITNESS our hands as of this 12th day of February,
1997.
/s/ Silas S. Cathcart /s/ Wesley M. Dixon, Jr.
- ------------------------------ ------------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.
/s/ James W. Cozad /s/ William J. Dolan, Jr.
- ------------------------------ ------------------------------
James W. Cozad William J. Dolan, Jr.
/s/ Susan Crown /s/ Raymond E. George, Jr.
- ------------------------------ ------------------------------
Susan Crown Raymond E. George, Jr.
<PAGE> 1
EXHIBIT 1(j)
[FORM]
NORTHERN FUNDS
AMENDMENT NO. 9 TO AGREEMENT AND DECLARATION OF TRUST
WHEREAS, Section 4.1 of the Agreement and Declaration of
Trust dated October 12, 1993 (the "Declaration") of Northern Funds (the
"Trust") provides that the Declaration may be amended to establish and
designate new Series or Classes of Shares by an instrument in writing executed
by a majority of the Trustees of the Trust and setting forth such establishment
and designation and the relative rights and preferences of such Series or
Classes;
NOW THEREFORE, the undersigned, being a majority of the
Trustees of the Trust, hereby:
(1) amend the Declaration by designating and establishing an
additional Series and Class of Shares to be known as the Initial Class
of the "Small Cap Index Fund," such Additional Series and Class to
have the relative rights and preferences set forth in Section 4.2(a)
through (m) of the Declaration; and
(2) determine that pursuant to Section 7.3 of the Declaration
the foregoing amendment shall be effective as of the date set forth
below.
WITNESS our hands as of this ____ day of __________,
1997.
- ------------------------------ ------------------------------
Silas S. Cathcart Wesley M. Dixon, Jr.
- ------------------------------ ------------------------------
James W. Cozad William J. Dolan, Jr.
- ------------------------------ ------------------------------
Susan Crown Raymond E. George, Jr.
<PAGE> 1
EXHIBIT 5(e)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 5 TO THE INVESTMENT ADVISORY AGREEMENT
This Addendum, dated as of the _____ day of __________, 1997,
is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY (the "Investment Adviser"), an Illinois
state bank.
WHEREAS, the Trust and the Investment Adviser have entered
into an Investment Advisory and Ancillary Services Agreement dated as of April
1, 1994 as amended by Addendum No. 1 dated November 29, 1994, by Addendum No. 2
dated March 29, 1996 by Addendum No. 3 dated August 7, 1996 and by Addendum No.
4 dated __, 1997 (the "Advisory Agreement") pursuant to which the Trust has
appointed the Investment Adviser to act as investment adviser to the Trust for
the Money Market Fund, U.S. Government Money Market Fund, Municipal Money
Market Fund, U.S. Government Select Money Market Fund, California Municipal
Money Market Fund, U.S. Government Fund, Fixed Income Fund, Intermediate
Tax-Exempt Fund, Tax-Exempt Fund, International Fixed Income Fund, Income
Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap Fund,
International Growth Equity Fund, International Select Equity Fund, Technology
Fund, Stock Index Fund, Short- Intermediate U.S. Government Fund, California
Intermediate Tax- Exempt Fund, Arizona Tax-Exempt Fund and California
Tax-Exempt Fund, Florida Intermediate Tax-Exempt Fund; and
WHEREAS, Section 1(b) of the Advisory Agreement provides that
in the event the Trust establishes one or more additional investment portfolios
with respect to which it desires to retain the Investment Adviser to act as
investment adviser under the Advisory Agreement, the Trust shall so notify the
Investment Adviser in writing and if the Investment Adviser is willing to
render such services it shall notify the Trust in writing, and the compensation
to be paid to the Investment Adviser shall be that which is agreed to in
writing by the Trust and the Investment Adviser; and
WHEREAS, pursuant to Section 1(b) of the Advisory Agreement,
the Trust has notified the Investment Adviser that it is establishing the Small
Cap Index Fund (the "Fund"), and that it desires to retain the Investment
Adviser to act as the investment adviser for the Fund, and the Investment
Adviser has notified the Trust that it is willing to serve as investment
adviser for the Fund;
<PAGE> 2
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints the
Investment Adviser to act as investment adviser to the Trust for
the Fund in accordance with the terms set forth in the Advisory
Agreement. The Investment Adviser hereby accepts such
appointment and agrees to render the services set forth in the
Advisory Agreement for the compensation herein provided.
2. Compensation. For the services provided and the
expenses assumed pursuant to the Advisory Agreement regarding
each Fund, the Trust will pay the Investment Adviser, and the
Investment Adviser will accept as full compensation therefor from
the Trust, a fee at the annual rate of_______ of the Fund's average
net assets.
3. Capitalized Terms. From and after the date
hereof, the term "Current Funds" as used in the Advisory
Agreement shall be deemed to include the Fund. Capitalized terms
used herein and not otherwise defined shall have the meanings
ascribed to them in the Advisory Agreement.
4. Miscellaneous. The initial term of the Advisory
Agreement with respect to the Fund shall continue, unless sooner terminated in
accordance with the Advisory Agreement, until March 31, 1998. Except to the
extent supplemented hereby, the Advisory Agreement shall remain unchanged and
in full force and effect, and is hereby ratified and confirmed in all respects
as supplemented hereby.
All signatures need not appear on the same copy of this
Addendum.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
NORTHERN FUNDS
Attest: By:
------------------- -------------------------------------
Title:
-----------------------------------
THE NORTHERN TRUST COMPANY
Attest: By:
------------------- -------------------------------------
Title:
-----------------------------------
<PAGE> 1
EXHIBIT 6(f)
[FORM]
AMENDED AND RESTATED
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
DATED _______________, 1997
Intending to be legally bound, the undersigned hereby amend and
restate Schedule A to the aforesaid Agreement to include the
following investment portfolios:
<TABLE>
<S> <C>
Growth Equity Fund Tax-Exempt Fund
Income Equity Fund Money Market Fund
Small Cap Fund U.S. Government Money Market Fund
Select Equity Fund International Fixed Income Fund
International Growth Equity Fund California Municipal Money Market Fund
International Select Equity Fund Stock Index Fund
Technology Fund Florida Intermediate Tax-Exempt Fund
Municipal Money Market Fund Arizona Tax-Exempt Fund
U.S. Government Select Money Market Fund California Intermediate Tax-Exempt Fund
Fixed Income Fund California Tax-Exempt Fund
U.S. Government Fund Short-Intermediate U.S. Government Fund
Intermediate Tax-Exempt Fund Small Cap Index Fund
</TABLE>
All signatures need not appear on the same copy of this Amended
and Restated Schedule A.
NORTHERN FUNDS
By:
--------------------------------
Title:
----------------------------
Date:
-----------------------------
SUNSTONE FINANCIAL GROUP, INC.
By:
--------------------------------
Title:
-----------------------------
Date:
-----------------------------
<PAGE> 1
EXHIBIT 8(m)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 5 TO THE TRANSFER AGENCY AGREEMENT
This Addendum, dated as of the __th day of _________, 1997, is entered
into between NORTHERN FUNDS (the "Trust"), a Massachusetts business trust, and
THE NORTHERN TRUST COMPANY, an Illinois state bank (the "Transfer Agent").
WHEREAS, the Trust and the Transfer Agent have entered into a Transfer
Agency Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated
November 29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3
dated August 7, 1996 and by Addendum No. 4 dated __, 1997 (the "Transfer Agency
Agreement") pursuant to which the Trust has appointed the Transfer Agent to act
as transfer agent to the Trust for the Money Market Fund, U.S. Government Money
Market Fund, Municipal Money Market Fund, U.S. Government Select Money Market
Fund, California Municipal Money Market Fund, U.S. Government Fund, Fixed
Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt Fund, International Fixed
Income Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small
Cap Fund, International Growth Equity Fund, International Select Equity Fund,
Technology Fund, Stock Index Fund, Florida Intermediate Tax-Exempt Fund, the
Short-Intermediate U.S. Government Fund, the California Intermediate Tax-Exempt
Fund, the Arizona Tax-Exempt Fund and the California Tax-Exempt Fund; and
WHEREAS, the Trust is establishing the Small Cap Index Fund (the
"Fund"), and the Trust desires to retain the Transfer Agent under the terms of
the Transfer Agency Agreement to render transfer agency and other services with
respect to the Fund and the record and/or beneficial owners of the Fund, and
the Transfer Agent is willing to render such services.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints the Transfer
Agent as transfer agent with respect to the Fund in
accordance with the terms set forth in the Transfer
Agency Agreement. The Transfer Agent hereby accepts
such appointment and agrees to render the services and
perform the duties set forth in the Transfer Agency
Agreement for the compensation therein provided.
<PAGE> 2
2. Capitalized Terms. From and after the date hereof, the
term "Current Funds" as used in the Transfer Agency
Agreement shall be deemed to include the Fund.
Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the
Transfer Agency Agreement.
3. Miscellaneous. The initial term of the Transfer Agency
Agreement with respect to the Fund shall continue,
unless sooner terminated in accordance with the
Transfer Agency Agreement, until March 31, 1998.
Except to the extent supplemented hereby, the Transfer
Agency Agreement shall remain unchanged and in full
force and effect, and is hereby ratified and confirmed
in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
All signatures need not appear on the same copy of this Addendum.
NORTHERN FUNDS
Attest: By:
-------------------- -------------------------------
Title:
----------------------------
THE NORTHERN TRUST
Attest: By:
-------------------- -------------------------------
Title:
----------------------------
-2-
<PAGE> 1
EXHIBIT 8(n)
[FORM]
NORTHERN FUNDS
ADDENDUM NO. 6 TO THE CUSTODIAN AGREEMENT
This Addendum, dated as of the ___ day of __________, 1997,
is entered into between NORTHERN FUNDS (the "Trust"), a Massachusetts business
trust, and THE NORTHERN TRUST COMPANY, an Illinois state bank ("Northern").
WHEREAS, the Trust and Northern have entered into a Custodian
Agreement dated as of April 1, 1994 as amended by Addendum No. 1 dated November
29, 1994, by Addendum No. 2 dated March 29, 1996, by Addendum No. 3 dated
August 7, 1996, by Addendum No. 4 dated August 6, 1996 and by Addendum No. 5
dated ____, 1997 (the "Custodian Agreement") pursuant to which the Trust has
appointed Northern to act as custodian to the Trust for the Money Market Fund,
U.S. Government Money Market Fund, Municipal Money Market Fund, U.S. Government
Select Money Market Fund, California Municipal Money Market Fund, U.S.
Government Fund, Fixed Income Fund, Intermediate Tax-Exempt Fund, Tax-Exempt
Fund, Income Equity Fund, Growth Equity Fund, Select Equity Fund, Small Cap
Fund, Technology Fund, Stock Index Fund, Florida Intermediate Tax-Exempt Fund,
Short-Intermediate U.S. Government Fund, California Intermediate Tax-Exempt
Fund, Arizona Tax-Exempt Fund and California Tax-Exempt Fund; and
WHEREAS, the Trust is establishing the Small Cap Index Fund
(the "Fund"), and the Trust desires to retain Northern under the terms of the
Custodian Agreement to act as the custodian for the Fund, and Northern is
willing to so act.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints Northern
custodian to the Trust for the Fund in accordance
with the terms set forth in the Custodian
Agreement. Northern hereby accepts such
appointment and agrees to render the services set
forth in the Custodian Agreement for the
compensation therein provided.
2. Capitalized Terms. From and after the date hereof,
the term "Funds" as used in the Custodian
Agreement shall be deemed to include the Fund.
<PAGE> 2
Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in
the Custodian Agreement.
3. Miscellaneous. The initial term of the Custodian
Agreement with respect to the Fund shall continue,
unless sooner terminated in accordance with the
Custodian Agreement, until March 31, 1998. Except
to the extent supplemented hereby, the Custodian
Agreement shall remain unchanged and in full force
and effect, and is hereby ratified and confirmed
in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this
Addendum as of the date and year first above written.
All signatures need not appear on the same copy of this
Addendum.
NORTHERN FUNDS
Attest: By:
-------------------- -------------------------------
Title:
----------------------------
THE NORTHERN TRUST COMPANY
Attest: By:
-------------------- -------------------------------
Title:
----------------------------
<PAGE> 1
EXHIBIT 9(g)
[FORM]
AMENDED AND RESTATED
SCHEDULE A
TO THE
ADMINISTRATION AGREEMENT
BY AND BETWEEN
NORTHERN FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
DATED ___________, 1997
Intending to be legally bound, the undersigned hereby amend and restate
Schedule A to the aforesaid Agreement to include the following investment
portfolios:
<TABLE>
<S> <C>
Growth Equity Fund Tax-Exempt Fund
Income Equity Fund Money Market Fund
Small Cap Fund U.S. Government Money Market Fund
Select Equity Fund International Fixed Income Fund
International Growth Equity Fund California Municipal Money Market Fund
International Select Equity Fund Stock Index Fund
Technology Fund Florida Intermediate Tax-Exempt Fund
Municipal Money Market Fund Arizona Tax-Exempt Fund
U.S. Government Select Money Market Fund California Intermediate Tax-Exempt Fund
Fixed Income Fund California Tax-Exempt Fund
U.S. Government Fund Short-Intermediate U.S. Government Fund
Intermediate Tax-Exempt Fund Small Cap Index Fund
</TABLE>
All signatures need not appear on the same copy of this Amended and Restated
Schedule A.
NORTHERN FUNDS
By:
---------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
SUNSTONE FINANCIAL GROUP, INC.
By:
---------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our Firm
under the caption "Additional Trust Information - Counsel and Auditors" in the
Statement of Additional Information included in Post-Effective Amendment No. 15
to the Registration Statement (1933 Act No. 33-73404; 1940 Act No. 811-8236) on
Form N-1A under the Securities Act of 1933, as amended, of Northern Funds. This
consent does not constitute a consent under section 7 of the Securities Act of
1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under said section 7 or the rules and regulations of the Securities
and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath
-----------------------------------
Drinker Biddle & Reath
Philadelphia, Pennsylvania
February 24, 1997
